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CHAPTERS IN 



POLITICAL ECONOMY. 



ALBERT S. BOLLES. 






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New York: 
D. APPLETON & COMPANY, 

549 AND 551 Broadway. 

1874. 






Entered, according to Act of Congress, in the year 1874, by 

D. APPLETON & COMPANY, 
In the Office of the Librarian of Congress at Washington. 



ALBERT P. STURTEVANT, Esq. 

THIS VOLUME IS DEDICATED 

AS A TOKEN OF 

The Author's Affectionate Regard. 



PREFACE. 

The chapters embraced in this work treat of the 
leadifig economic questions which are rife in our 
country. Although most of the chapters have ap- 
peared in magazines during the past two years, 
yet a unity will be foimd pervading the work. 
An attetnpt has beeti made to handle the questions 
in a thorough manner, to dig down for principles 
which are fundamental, though the author was 
conscious t/iat, in so doing, the work would lose 
something of its interest to those who only seek to 
glide over the surface of things. If ever the ques- 
tions of labor, money, exchange, taxation, and the 
like, are to receive a permanent settlement, they 
must be traced back into the region where prejudice 
and feeling do not enter, however dry and uninvit- 
ing may be the investigation. 

Noriuich, Conn., September, 1874. 



CONTENTS. 

PAGE. 

I. — The Field and Importance of Political Economy, i 

II. — The Payment of Labor, . . . . 15 

III. — On the Increase of Wages, .... 28 

IV. — Effect of Machinery on Labor, . , . . 41 

V. — On the Meaning and Causes of Value, . 48 

VI. — A Measure of Value, ...... 73 

VII. — Money and its Uses, 81 

VIII. — Decline in the Value of Gold and Silver, 10 i 

IX. — The Money of the Future, . . . .113 

X. — The Good and Evil of Banking, . . 117 

XL — The Financial Panic of 1873, .... 140 

XII. — The Relation of Banks to Speculators, . . 149 

XIII. — The Influence of Credit on Prices, . . 166 

XIV. — On Legal Interference with the Loan of 
Money, Payment of Labor, and Contracts of 

Corporations, 170 

XV. — The Advantages of Exchange, . . . . igo 

XVI. — Taxation, ........ 200 



I. 



THE FIELD AND IMPORTANCE 
OF POLITICAL ECONOMY. 



In The Principles of Economical Philosophy* Macleod has given 
an elaborate criticism upon several definitions of political economy, 
and then offered one himself which, in his opinion, " appears to 
state clearly and distinctly the nature and extent of the science, 
and to be free from the ambiguities connected with the words 
wealth and value." At the risk of being ambiguous, we shall not 
give a definition so precise, because a commoner one can be more 
easily understood. According to an old and well-received defini- 
tion, the principles of political economy relate to the production, 
distribution, exchange, and consumption of wealth. No higher 
origin is claimed for these principles than an enlightened self- 
interest. They are such as every man entertains having regard 
solely for his own interests from the most enlightened point of 
view. 

Although without moral foundation, these principles yield the 
same results in the production, distribution, exchange, and con- 
sumption of wealth, as obedience to a perfect moral code. Wher- 
ever economic and moral science touch, the principles of human 

* p. 132, 2d ed. 



2 FIELD AND IMPORTANCE 

conduct prescribed by each are seen to be the same.* The 
remark of Dr. Wayland is perfectly true, that " the principles of 
political economy are so clearly analogous .to those of moral phi- 
losophy, that almost every question in the one may be argued on 
grounds belonging to the other. "f 

For example, moral science condemns laws made in restraint of 
trade. I It teaches that every man has the right to traffic where 
he pleases, unfettered by State lines. The primary object of enact- 
ing such laws is to enrich the few at the expense of the many. 
The protectionist urges their enactment for the public good, or for 
some reason beyond his own aggrandizement; the history of legis- 
lation clearly shows that the prime object of all protective laws is 
to benefit particular individuals, or a class, and not all. Of course, 
moral science condemns such legislation. 

They are condemned by political economy also, which looks at 
them with the sharp eye of enlightened selfishness. It sees that 
if the public good is the object of protection, everything must be 
protected conducive to that end; and if this doctrine be admitted, 
protective laws will be enacted so generally as to afford protection 
to nothing. If the principle is not to receive a logical and just 
application, and merely that a few things most needed by the 
public are to be protected, their increased cost to the consumer 
will result in his protecting himself by charging more 'for whatever 
he sells, so that, after a time, the effect of protective laws is com- 
pletely neutralized. 

Moral science, then, condemns legal protection because it is 
wrong; economic science because it is impossible to get protection 
by operation of law. The conduct of people in either case is the 

*■ Perry's El. of Polit. Econ., p. 37, 5th ed. 

t Pref. El. of Polit. Econ., p. 4, 4th ed. 

X For an elucidation of the operation of protective laws, see chap. isth. 



OF POLITICAL ECONOMY. 3 

same, only it is impelled by different motives in one case than in 
the Other. 

As this position will hardly be assailed by any one — that the 
principles of economic and moral science yield the same results — 
is it not better to transfer the principles of political economy from 
a selfish to a moral basis ? We favor this transfer for four rea- 
sons. 

First, more persons will be drawn to the study of economic 
principles. Now, it is said, they are cold and bloodless, and tend 
to increase human selfishness. If made a portion of the truths of 
moral science, . this objection to them will disappear. 

Secondly, in the classification of knowledge, it will be easier 
to find an appropriate place for political economy. Instead of 
being a piece of knowledge standing apart by itself, it will form a 
subdivision of moral science. Political economy in that case would 
constitute that part of moral science relating to the production, 
distribution, exchange, and consumption of wealth. 

Thirdly, after deriving the principles from a moral source, they 
can be enforced by showing their harmony with enlightened self- 
interest. Thus the combined power of morality and selfishness can 
be used to sustain these principles by founding them upon a 
moral basis. We have previously seen in the example of pro- 
tective legislation, how the selfish mind, cold, clear, and enlight- 
ened, supplements and enforces the transparent conclusions of 
morality. Moral science condemns such laws because they are 
wrong; economic science because they are at war with self-interest 
and have only a nominal, and not a real, existence after a period.* 

Fourthly, political economy is properly a subdivision of moral 
science, because the will operates in every transaction with which 

* The insufficiency of enlightened self-interest as a competent basis for economic science has 
been ably discussed by Frederic Harrison in the Fort. Rev., vol. t, p. 336. 



4 FIELD AMD importance 

economic science is concerned. This faculty exercises only moral 
functions. If the principles of political economy were immutable, 
if the will were a stranger in their production, if no moral quality 
adhered to them, political economy would be entitled to a seat 
among the exact sciences. But these principles are not fixed, 
because the human will is an element determining what they 
are. The rules which have guided men in the past respecting 
the acquisition or disposition of their wealth, are only hypotheses 
in respect to what they will do in the future. Quite absurd is 
the claim that economic principles are absolutely fixed, and there- 
fore purely scientific principles. Having no place in exact literature, 
and the will being a part of the machinery by which economic 
principles are created, they ought to be relegated to the domain 
of moral science.* 

If the principles of political economy are transferred from a sel- 
fish to a moral basis, the method of searching for them is not 
changed. Economic principles are still the fruit of induction. 
And it is worthy of note how extensively employed is the induc- 
tive method in political economy. Adam Smith, it is true, did 
not write an inductive treatise. His Wealth of Nations is a great 
landmark in the history of thought, but its success is due to the 
fact that he put ten years of patient labor upon the work, com- 
bining in the happiest manner a philosophic insight with a knowl- 
edge of practical life, deducing therefrom principles which have 
found universal acceptance. It is easier to dream and speculate 
than to burrow amid a great mass of facts; yet, as the gold in the 

, * Jevons, in his Theory of Polit. Econ., has united moral and economic science, making 
pleasiire the end, and declaring that "the object of economy is to maximise happiness by pur- 
chasing pleasure, as it were, at the lowest cost of pain" (p. 27). As Jevons is a utilitarian, of 
course pleasure is the highest end for man according to his philosophy, though he gives a 
wider interpretation to the term than his master, Bentham, whom he so much admires. See 
pp. 27-32. 



OF POLITICAL ECONOMY. 5 

earth can be found only by toilsome mining, so the gold of eco- 
nomic truth is hid in great masses of facts which must be dug 
over to find it. Never did finer logicians or acuter reasoners 
exist than the schoolmen; never did a class of men commit greater 
mistakes. These followed from wrong premises. Political economy 
has followed too much a similar method. This is one reason why 
it has failed to convert men. It has been too speculative.* The 
change of method among economists in this respect is remarkable. 
Fifty years since, Thomas Tooke applied the inductive method in 
his History of Prices with enduring success. Later, Richard Jones 
applied it to the subject of Rent ; similarly, Edwin Chadwick in 
his investigations into the questions of Factory and Infantile 
Labor, and Sanitary and Poor-Law Legislation. In 1867, Rogers 
published his work upon the Agricultural Prices and Wages in 
England during the Twelfth and Thirteenth Centuries, a monu- 
ment of patient investigation, a work which gave a new rendering 
of the social and economic history of England for the period it 
covered, "enabling us to see," says NEWMARCH,t "in detail, how 
far-reaching and potent were wages, prices, and pestilences in mod- 
ifying from top to bottom the coherence of the English polity, 
and the power of our sovereign lord the king, under the early 
Plantagenets." 

Other economic works might be spoken of, prepared in a simi- 
lar way, Dudley Baxter's books upon National Income, and Tax- 
ation of the United Kingdom, and Leoni Levi's History of British 
Commerce, are examples. As for France, she has been noted for 
her economists who have burrowed and lived among the facts. 

* " Half, and more than half, of the fallacies into which persons who have handled this subject 
have fallen, are the direct outcome of purely abstract speculation." Rogers in preface to his 
edition oi Smiih's IVealth of Nations, p. 41. 

t Address before the British Social Science Association, 1871. 



6 ' FIELD AND IMPORTANCE 

Chevalier, in all his works, has kept close to the inductive 
method. So has M. de Lavergne when treating upon the moral 
economy of his own and other countries. M. Levasseur and M. 
Le Play have considered the claims of the working classes of 
France in a similar manner. The same may be said of M. Jules 
Simon. 

Of the political economists in our own country following this 
method, not so much can be said. The most prominent example 
who has addressed himself to the mastery of facts as the founda- 
tion of his subsequent reasonings, is David A." Wells. In his 
reports to the National Government and to the State of New 
York, and in other papers, he has adhered rigidly to the induc- 
tive method. For many years pursuing physical science, he has 
employed its methods in finding out the principles of political 
economy. His results have, in some instances, been as unexpected 
to himself as they were startling to the public. They are none 
the less true, however, or less likely of being accepted in the end. 
The National and State Governments are learning the value of 
this method, for they are appointing commissions and requiring 
investigation and reports upon many subjects lying in the province 
of political economy. Never was a more inviting field of investi- 
gation open to the student of economic science than our own 
country, nor one where patient, honest investigation was more 
needed. The facts are lying around in the greatest profusion, 
while the honest and accurate gatherers are few. 

Although the true principles of political economy are ascertained 
by induction, and all others are only guessed, yet none are hard, 
fixed laws that never change in their occurrence, like the move- 
ments of the sun. On the other hand, the element of human free- 
dom, as we have previously remarked, enters into their composi- 



OF POLITICAL ECONOMY. 7 

tion, preventing us from determining their absolute truth, as we 
can the laws of physical science. Macleod, in his Principles of 
Economical Philosophy* has labored industriously, and with great 
ability, to bring economic science within the domain of physical 
science, but we cannot regard his attempt as successful. Comte 
and John Stuart Mill have comprehended the nature of eco- 
nomic principles more perfectly. They admit the play of the human 
will ; hence the Frenchman was consistent in rejecting political 
economy from his scheme of positive philosophy. One of his dis- 
ciples,t in vindicating his master, has very well said : " So far as 
physical conditions go, and up to a point where moral conditions 
begin, strict scientific laws can be established. . . . Directly 
the data of the study become affected by moral conditions, the 
conclusions of the economist as such cease to be scientific laws, 
and are only hypotheses." For this reason, therefore, political 
economy can never become an exact science. However far we 
may carry our inductions, a large element of variation must be 
allowed for the action of the will. As the land surveyor can 
never determine with exactness surface and direction on account 
of variation of the needle, so the economist can never discover by 
the most patient study of facts, any unalterable laws of economic 
science, because of the infinite variations in the will of men. The 
farthest he can go is to ascertain how men have acted under for- 
mer conditions, and form the hypothesis that, under like condi- 
tions, similar actions will be produced. \ 

As the principles of political economy are ascertained by induc- 

* Chap. I. t Frederic Harrison, Fort. Review, vol. i, p. 369. 

* David Svme has declared that the "inductive method is alone apphcable to the investiga- 
tion of economic science, and that we shall never be able to make any solid progress so long 
as we continue to follow the A priori method." IVest. Rev., vol. 95, p. 100. On same subject, 
see Prof Cairnes' Character uTtd Logical Method 0/ Polit. Ecoii., Lee. ii. 



8 FIELD AND IMPORTANCE 

tion, any one capable of making an induction can find them out. 
A knowledge of economic principles involved in a particular pur- 
suit is not necessarily limited to those engaged in that business. 
The sole advantage one man has over another of equal ability is 
in a knowledge of facts, out of which inductions spring. 

Thus the charge, that only business men, practical men, can 
understand the principles of political economy, is conclusively 
refuted. The charge contains this basis of truth and no more— 
that business men often know more facts concerning their business 
than outsiders; hence they are more capable of forming correct 
conclusions. 

The history of political economy attests the truth of this, asser- 
tion. For, who are the most successful cultivators of the science? 
Who have wrought out those principles which most persons are 
willing to admit as true and of great importance ? Are they the 
discovery of practical men ? By no means. The great lights in 
economic science, from the day of Adam Smith to this, have not 
been practical men.* Political economists have walked with the 
man of business, have gleaned from him all that he knew, and, 
not content with exhausting one storehouse of experience, have 
exhausted others, dug in rare and rich mines of which practical 
men had no knowledge perhaps, or no time or inclination to ex- 
plore. As the reader of the description of a battle may acquire a 
more perfect knowledge of it than a participator therein, because, 
as an eye-witness, the latter knows only what happened immedi- 
ately around him, so the pohtical economist may acquire a wider 
knowledge of economic principles governing a particular business 

* " In every country in which it has been successfully cultivated, most of the contributions to 
it of any value have been made by writers who were not of the business world, but surveyed 
its operations from a distance; men for whose opinions op business matters few merchants or 
manufacturers would have given five cents." The Nation, vol. 2, p. 146. 



OF POLITICAL ECONOMY. 9 

even, than a person who has given to it the attention of a Hfe- 
time. 

A poHtical economist can see economic principles more clearly 
because his view is not mystified by pecuniary interest. His judg- 
ments are unclouded by prejudice; undisturbed by the thought of 
gain or loss. We need not indulge in any platitudes as to the 
unconscious warpings of opinions and beliefs by interest and 
desire ; the fact is common to all. 

A conspicuous illustration of the eminent service sometimes ren- 
dered by the theoretical economist, is the creation of the National 
banking system. This was the work of the Rev. John McVickar, 
Professor of Political Economy in Columbia College. In 1827, he 
wrote a letter to a member of the legislature of the State of New 
York, entided Hints on Banking, in which he developed the sys- 
tem now in practice. This discovery excited the admiration of an 
eminent banker, John E. Williams, President of the Metropol- 
itan Bank of New York, who has remarked that " to a practical 
man of business — an every-day banker — it seems wonderful that a 
scholar, investigating questions in political economy, on purely 
scientific principles, should be able to see not only the practical 
workings of existing laws, and understand the indissoluble relations 
of money and trade, but should be also able to foresee and fore- 
tell what changes were necessary to produce the highest prosperity 
and secure the greatest safety to the community."* 

Not infrequently the principles of political economy are declared 
to be mere theories. Some of them are nothing more. The dif- 
ference, however, between theoretical principles, and those derived 
from experience, is clear enough. Scientists are continually mis- 
taking principles for theories, regarding things as proved which are 

* Old and New Mag., voL 8, p. 590. 



lO FIELD AND IMPORTANCE 

not, but only asserted or believed. That theories are useless, as 
some contend, we deny. Nay, they are absolutely necessary ; no 
man can conduct his business without them. " What is practice 
without theory," enquires an eminent French economist,* " but 
the employment of means without knowing how or why they act." 
To which the words of Prof Price t may be added. "It is a 
mistake, though a very common one, to suppose that practical 
men, as they are called, are destitute of theory. The exact reverse 
of this statement is true. Practical men swarm with theories, none 
more so." Theories are well enough,^ only they must be regarded 
as such ; no harm is done to economic science in including both, 
if the separation of principle from theory be clearly made. 

The flaw with some of the principles of political economy, like 
many of the inductions of science, is that they rest upon insuffi- 
cient foundations. A few facts are gathered, and from them a 
principle is deduced, which, indeed, may be correct, yet which 
would give way to another principle, perhaps, were a wider induc- 
tion made. Every result is produced by several causes, nevertheless 
we are constantly blundering by satisfying ourselves with finding a 
single cause, and so look no farther. 

To some it may seem a waste of time and space to say any- 
thing concerning the importance of knowing the principles of 
political economy. Yet there are peculiar reasons for saying some- 
thing on this point. The extraordinary prosperity that has visited 
our country has spread a kind of poetic haze over the whole 
machinery of society, and led us to regard all inquiry into its 

* Say. Treat, on Polit. Econ., Intro., p. 24, 4th Am. ed.. t Princ. of Currency, p. i, 

% Sir William Hamilton says : " Theory is dependent on practice ; practice must have 
preceded theory; for theory being a generalization of the principles on which practice proceeds, 
these must originally have been taken out of, or abstracted from, practice." Lecture on Met., 
p. 120, Am. ed. 



OF POLITICAL ECONOMY. II 

working as an idle speculation. Before the enactment of the great 
tragedy between the North and South, there were but few ques- 
tions relating to the administration of the government involving 
the application of any principles of political economy. The 
great debates in Congress were upon constitutional law, internal 
improvements, slavery, and like questions. With the breaking 
out of war, these questions passed away. The country had gone 
through the formative period of finding out the meaning and scope 
of the organic law. Congress was confronted with economic ques- 
tions. With these it was ill prepared to deal. It had only the 
scantiest knowledge of them, except the question of taxing im- 
portations. The Congressional Globe is the enduring monument . 
of the ignorance displayed by members of congress upon questions 
involving economic principles.* 

To what new economic conditions did the war give rise ? It 
created a great debt, the interest and principal of which must be 
provided for and paid. A national currency and system of bank- 
ing have been created. How our country blundered in raising 
money to maintain the war, and spent it ; how the strife might 
have been carried on and the debt been less than half it is, are 
mistakes which we shall not recall. 

Unquestionably our country has suffered most fearfully from an 
ignorance of, or failure to apply, some of the most familiar prin- 
ciples of political economy. One of its most distinguished teachers, 

* We shall give a couple of fair specimens. "All governments fix the value of gold and sil- 
ver; and without their guvemment stamp gold and silver would be a simple commodity, like 
other things having intrmsic value. Some governments fix the value of coin higher, and some 
lower; just as each for itself chooses to determine." — E. G. Spaulding; speech on Demand- 
Note Bill, January 28, 1862. 

"This currency," referring to demand notes or legal tenders, "can be converted in such a 
manner as to yield six per cent interest on its par value; it can never greatly depreciate, 
because the moment the capitalist holding it sees any evidence of its depreciation, he will con- 
vert it into the bonds bearing interest, giving him a perma'nent income. Thus it secures itself 
against over-circulation." — Speech 0/ Samuel Hooper on same subject. 



12 FIELD AND IMPORTANCE 

Amasa Walker, clearly set forth in a congressional speech, during 
the early part of the war, how it might be carried on at less 
than half the expense which Congress was likely to incur, by 
sticking to specie payments, instead of abandoning them for an 
irredeemable paper currency. His words, deemed foolish then, 
have long since borne evidence of their wisdom and truth. The 
issue of an irredeemable currency, so pointedly condemned by him 
and other economists, has wrought a thousand curses to our coun- 
try, from which we are suffering to-day and are to suffer for years 
to come. 

Letting the past go, many of our politicians do not yet under- 
stand the principles of political economy, the application of which 
are needed to settle questions confronting the nation. For exam- 
ple, there are questions of taxation both upon imports and prop- 
erty at home. The principles which should govern in these 
matters, some of our politicians are as ignorant of as the grandest 
truths in astronomy. The National banking system, the currency, 
free banking, specie payments, redemption of legal-tender notes — 
are all subjects within the domain of political economy, whose 
principles must be mastered if these matters are to receive a 
rational settlement. The views entertained upon these questions, 
the nonsense and ignorance displayed by Congress when grappling 
with them, would be laughable were the results not so sad and so 
disastrous to the people. 

Every session of Congress discloses its inability to grapple with 
economic questions.* When matters of foreign policy are discussed, 

* Perhaps our congressmen may profit by learning what Burke thought of political economy : 
" If 1 had not deemed it of some value, I should not have made political economy an object 
of my humble studies from my very early youth to near the end of my service in Parliament, 
even before (at least to any knowledge of mine) it had employed the thoughts of speculative 
men in other parts of Europe. At' that time it was still in its infancy in England, where, in 
the last century, it had its origin. Great and learned men thought my studies were not wholly 



OF POLITICAL ECONOMY. I3 

or treatment of the Indians, or internal improvements, or, in the 
olden time, when dealing with slavery, a knowledge and mastery 
of the several subjects is evinced, although not all reached similar 
conclusions. This cannot be said of the senators and representa- 
tives in Congress in respect to economic questions, excepting a 
member who appears occasionally, for a brief season, within the 
national halls. 

It is desirable, therefore, for every person proposing to serve his 
country in a public capacity to understand the principles of politi- 
cal economy, for they apply to the most important questions of 
national legislation.* No one will dispute how the character of 
national legislation has been changed by the war, and that finan- 
cial measures and taxation are the most conspicuous questions 
upon which Congress legislates. 

Again, the principles of political economy are growing in im- 
portance to the individual in his business relations. Consider the 
relations of capital and labor. How this question looms up before 
the whole world. It is one of the mightiest questions of the age. 
It has assumed a magnitude surpassed by no other. It is con- 
vulsing the business of manufacturing and other pursuits. For 
years and years this question will hang like a mighty cloud over 
the people. Is it not desirable to find out all that can be known 
concerning the relation of the capitalist and laborer? Yet who 
has investigated this question most profoundly ? The political 
economist. The question lies within the domain of economic 

thrown away, and deigned to communicate with me now and then on some particulars of their 
immortal works. Something of these studies may appear incidentally in some of the earliest 
things I puhlished. The House has been witness to their effect, and has profited of them, more 
or less, for above eight-and-twenty years." — Letter to a Noble Lord on the attacks upon his 
pension ; Burke's works, vol. 5, />. 192. 

* Said CoBDEN to the House of Commons, when addressing them on the com laws: "It 
may be material for you to get right notions of political economy ; questions of that kind will 
form a great part of the world's legislation for a long time to come." — Speeches, vol. i, /. 384. 



14 FIELD AND IMPORTANCE OF POLITICAL ECONOMY. 

science. And it has been patiently and thoroughly investigated by 
the economist in all its phases.* 

The same is true of other questions. Take the question of 
restrictive laws upon foreign importations, for example. Shall the 
policy of the government be continued? Is it for the advantage of 
any one ; if so, whom ? Are the laboring classes benefited by it ? 
Is the National banking system a good one ? Do we need more 
currency ? These, and a host of similar questions, fall within the 
range of political economy, and have been more carefully investi- 
gated by economists than by empirics, who, possessing a little knowl- 
edge and having achieved fortunes, find it hard to believe that any 
one has anything to tell them upon trade, finance or commerce.! 

For these special reasons, the principles of political economy 
have a value to the statesman and man of business hitherto un- 
known or denied.| It is gratifying to know that a knowledge of 
these principles is rapidly widening. The issuing of eleven editions 
of Prof. Perry's Elements of Political Economy within so short a 
period, is proof that the people are awaking out of sleep and 
coming to believe that ignorance of the principles of political econ- 
omy — which has cost us so much as a nation and as individuals 
— is not bliss pure and unalloyed. A little wisdom is to be pre- 
ferred, and the streaks of light beginning to be seen in Congress 
we trust will grow in. power and magnitude until that body pos- 
sesses the knowledge necessary to discuss and settle wisely the 
great economic questions which involve the prosperity and happi- 
ness of the republic. 

* If the remark of Cobdkn be true — that " the principles of political economy have elevated 
the working class above the place they ever filled before" — should they not seek to master 
these principles ? — Speeches, vol. 2, p. 373. 

t The advantages to 'be derived by the Christian ministry from the study of political econ- 
omy are admirably stated by Prof. Boardman in the Bib. Sacra, vol. 23, p. 73. 

\ The reasons why political economy has not been cultivated in America, are concisely given 
in The Nation, vol. 2, p. 255. 



11. 



THE PAYMENT OF LABOR. 



This question has attracted more attention in Europe, especi- 
ally in England, than here; for there laborers have been paid less 
and have suffered more, and they have oftener resorted to strikes 
and other rude methods to increase their wages. Yet the wave of 
discontent has reached our shore, and is breaking, with more or less 
fury, over every part of the land. Not a more important question 
in political economy calls for settlement ; not one is likely to give 
rise to graver difficulties and greater suffering before a settlement 
is reached. 

The contest between capitalist and laborer is a contest between 
present and accumulated labor. Capital is labor saved, nothing 
more.* The contest is between him who has saved his labor, or 
inherited it, and him who has less. It is a contest of the laborer 
with the laborer, after all. 

There is a very gradual shading between the capitalist having 
many millions, and the laborer having nothing except his brains 
and limbs. One man has a vast fortune, another a hundred 
thousand dollars, another a quarter of that sum, another his farm, 
another his brains, one a store of goods, one a set of tools, 
another a shovel. Thus the gradations from the capitalist to the 

* Technically, labor is exertion demanding something for itself in exchange. — Perry, p. 122. 



l6 . THE PAYMENT OF LABOR. 

laborer shade off almost imperceptibly, and it is not easy to class- 
ify all persons. 

As to the true relation between capitalist and laborer, there is 
scarce a division of opinion. Says Prof Perry :* " There is no 
sense or reason in the common jealousy of workmen towards em- 
ployers. There is no real antagonism between them. Their 
interests lie along the same line. They are partners in the same 
concern." And this is the common language of all who have 
investigated the subject. 

It may be very easily shown that the true interests of labor and 
capital are identical. Without the employment of capital, laborers 
in many cases could not live. An accumulation of capital is 
necessary to undertake most of the enterprises of the world. 
While a machine is being made, a railroad built, a crop raised, 
capital is required upon which to subsist. Without capital, people 
would live from hand to mouth, according to the common saying; 
that is, would return to their original state, and live by fishing, 
hunting, the fruits of the earth, and the like. It is by saving, 
accumulating capital, that the world has been able to make such 
progress — to build factories and railroads, and' undertake thousands 
of enterprises, the returns upon which, though sure to come, may 
be long delayed. 

The capitalist has the means to accomplish these things, if 
united with labor. He can do nothing without it. To build a 
railroad, labor is just as essential as capital. Both are indispensa- 
ble elements. Hence the theoretical truth that they operate in 
perfect harmony. Were the rich man totally unable to unite his 
capital with labor, he would become a beggar; were the work- 
man unable to get employment from the capitalist, he would 

* EL of Polit. Econ., p. 148, sth ed. 



THE PAYMENT OF LABOR. 17 

Starve. The interests of the two are, therefore, inseparably united; 
their need of each other is equally great. 

What is their actual position ? This is not a pleasant investiga- 
tion to make. We shall present a dark picture of the motives 
ruling the greatest portion of mankind. Yet let it be remembered, 
that our investigation is general; it does not apply to every indi- 
vidual case. There are unselfish employers and laborers. We seek 
to analyze the motives which generally actuate the two classes. 
What are these ? 

The laborer is determined to get the highest wages for the least 
work; the employer the most work for the least wages.* The 
motives of the two classes are the same. The question of paying 
or receiving a reasonable compensation is not the one determining 
the question. How much can I get? how little can I pay? these 
are the questions asked. 

The trades-unions of Great Britain have declared this again 
and again. In the Edinburgh jReview,] their object is clearly set 
forth : ** ' The final end ' of the trades-unions is ' to raise to the 
highest practical point the rate of wages,' and it is their maxim 
that no work should be done heartily; to 'evade' work and to 'loi- 
ter' at work are rules; 'he who is most skillful in these arts is the 
greatest benefactor to his order ; ' ' the sluggard, according to the 
standard of the unions, must be the model workman ; ' the union- 
ists have plans for making work that is useless to their employers; 
they, in some cases, oppose the use of machinery, and compel 
the public to make use of inferior articles — for example, hand- 

* Burke has said : " There is an implied contract, much stronger than any instrument or 
article of agreement, between the laborer in any occupation and his employer — that the labor, 
so far as that labor is concerned, shall be sufficient to pay to the employer a profit on his cap- 
ital and a compensation for his risk; in a word, that the labor shall produce an advantage 
equal to the payment."— TAoug-A(s and Details on Scarcity, vol. 5, p. 137. 

t July No., 1868. 



l8 THE PAYMENT OF LABOR. 

made bricks : the Leeds bricklayers have a rule against one man 
carrying more at a time than 'the ridiculously small number of 
eight bricks'; walking slowly to work, so as to consume as much 
as possible of the master's time, has been acted on as a rule ; the 
trades-unions aim at ' making as much work as possible,' ' by ren- 
dering the labor of each less efficient ; ' the union is, in some 
cases, so ' omnipotent over masters,' that ' the industrial machine 
is. turned topsy-turvy;' in cases of outrage, employers are afraid 
to prosecute, and a witness who appears in court against a trades- 
union, ' must be helped to emigrate.' " 

This is, indeed, an extreme view. But it is the view of thous. 
ands. The workman is quite as selfish a being as his employer; 
we cannot credit him with having better motives. 

What can the capitalist say for himself? Is he less selfish ? 
Does he love his money less than those whom he employs ? Let 
the lon^ ecord, especially of British industry, answer. The capi- 
talist has had the advantage of his workman, and he has rarely 
failed to use it. It is a hard truth that the world is forever trying 
to get advaatage of each other. If all laborers were willing to 
work for a reasonable, or just price, and all capitalists were willing 
to pay it ; if every exchanger were willing to buy and sell accord- 
ing to the same beautiful rule — the world would move on in per- 
fect harmony. Unhappily, this is not the case. Every man seeks 
to get the most he can for what he sells, and pay as little as pos- 
sible for what he buys. This is the law of the world. In order 
to carry out the law, all are forever inventing methods by which 
they can overreach each other, while the overreached are continu- 
ally applying counter-protectives. 

If a restrictive tariff law is enacted by which a railroad com- 
pany pays twenty-five per cent, more for its rails, it makes up the 



THE PAYMENT OF LABOR. I9 

advantage thus accruing to the home manufacturer by raising the 
price of freights.* If a man intends to buy anything, he hides his 
real intentions from the seller if he can. Why? Because he fears 
the seller will take advantage of the buyer's situation to raise the 
price. So men hide their real purposes, pretending not to want 
very badly, although their wants may be great; pretending to be 
not very desirous of selling, although wishing to sell even at a 
loss; and thus deceptions are employed; each afraid to tell the 
honest story of his condition, and trust his fellow, because he 
knows that, generally, men will take advantage of each other if 
they can. The capitalist is like the rest, and, unfortunately for the 
laboring class, he has an advantage over them which it is difficult 
for them to overcome. He can live if all his capital is not em- 
ployed in reproduction; their labor will not keep, and, if they are 
not employed, they perish. 

For example : A owns a factory run by a hundred hands. They 
demand higher wages and refuse to work until they be given. But 
the owner says : " No, I will stop my mill first." He has prop- 
erty besides, and can live upon that until it is exhausted; perhaps 
he has enough for his support always. But if the laborer does 
not work, he will starve. It is clear enough, then, that A holds 
his help in the hollow of his hand and can squeeze them as hard 
as he pleases. This is the fact, and every true observer will say 
so. Admitting the truth of all the beautiful theorizing about the 
necessary marriage of labor and capital in order to bring forth 
fruits for both, capital often has a decided advantage. 

The laborer sees this. He says : " The capitalist has a great 
advantage over me, he can compel me to make a contract by 

* S«e Col. Grosvenor's admirable article on The Railroads and the Farms, as an illustration. 
At. Monthly, vol. 32, page 591. 



20 THE PAYMENT OF LABOR. 

which I am not fairly paid for my services." It is like telling a 
man to deliver up his money or forfeit his life. The capitalist 
says : " Work for me for so much or I will starve you to death." 

And because he has this advantage over the laborer, most capi- 
talists are not slow to avail themselves of it, and this is the cause 
of the enmity between the two classes. 

The laboring class receive more sympathy because they are 
placed at the greatest disadvantage; they are not, in truth, a whit 
better than their employers, because, when they become wealthy, 
as many of them do, they quickly come to see things as other 
capitalists, and take up practices which once they condemned. 

This is not an encouraging view of human nature, though it 
must be said, lest some one be deceived. Capitalist and laborer, 
each seeks to do the best he can for himself, each regards his in- 
terests as antagonistic to those of the other, each seeks to get 
every advantage over his opponent, but the capitalist is. most 
favorably situated, he has more advantages, and can generally get 
the better half of the bargain with the laborer. This is the real 
situation of both classes. 

In making the contract for labor, we maintain that the laborer 
ought to be willing to work for a reasonable price, and the em- 
ployer ought to be willing to pay it; and each ought not to take 
advantage of the situation of the other. If labor be plenty, the 
employer ought to pay as much, other things with him remaining 
the same; if scarce, the employed ought to ask no advance of 
wages, provided his condition in other respects remains unchanged. 
In short, people ought not to take advantage of each other as 
they do. 

This law men are violating continually. The capitalist declares 
that, as he is not bound to employ laborers at all, he has the 



THE PAYMENT OF LABOR. 21 

right of paying them any price that may be agreed upon. In 
other words, as he is independent of the workman, he may pay 
him as Httle or as much as he pleases. The plea on behalf of 
the capitalist has been put by Mr. Thornton,* in the following 
form : " Capital, being under no previous obligation to enter into 
arrangement with labor at all, is at liberty to reject any arrange- 
ment to which she objects, and is entitled to whatever profit may 
accrue to her from any arrangement to which labor and herself 
mutually agree. That the profit which thus accrues to capital 
may be fairly regarded as the produce of the labor by which the 
capital was created and which it represents, and would thus, in 
the absence of any agreement, belong entirely to capital, for the 
self-same reason for which unassisted labor is entitled to take as 
its reward the whole of its own produce." Is it true that the 
capitalist is under no obligation to enter into agreement with the 
laborer ? Let us examine the question. 

What are the relative positions of the two ? Let the capitaUst 
cease to employ the laborer, and how much capital has he left ? 
Absolutely nothing. The laborer keeps him from sinking. Dis- 
pense with his services, and capital vanishes into thin air. Dis- 
pense with labor, and every vessel will rot at the wharves, every 
farm will run to weeds, the spindle will not give out its music. 
No man will have anything except what he can get by direct exer- 
tion. As for selling his property and living upon the income, who 
will buy if no labor can be employed ? A great factor)' would 
not sell for a dollar, because it would be of no more use to the 
purchaser than the moon. That all desire to preserve their prop- 
erty and enhance its value, is a general truth which no one will 
deny. Of course, there are spendthrifts who have no ability or 

* Oh Labor, page 138. 



22 THE PAYMENT OF LABOR. 

desire to acquire property, or to keep what they may have inher- 
ited. But this is not true of mankind in general. Their desire is 
for more wealth, to save what they have and add to its value. 
These two facts then being true, — that all are intent upon saving 
their property, and that labor is absolutely necessary for this pur- 
pose, — the property-owner ought to be willing to pay a fair com- 
pensation for the labor whereby his riches are saved and increased. 
Now, the usual way of looking at this question is this — no man 
is obliged to build a ship, or a factory, in order to employ labor, 
because he can loan his money to others. Very true, yet what do 
they want of it if they do not employ labor with it ? If the man- 
ufacturer gets tired of his business and resolves to quit upon the 
ground that he is under no obligation to employ any one, he 
sells his establishment, and what then ? Why, he invests his prop- 
erty in other concerns which employ labor. He employs and pays 
for labor less directly; that is the only difference. His money is 
put to the same use as before. He buys railroad stocks, but the 
railroad employs labor in great quantities. He puts it in a bank, 
but the bank employs labor, and loans its capital to others who 
use it for the employment of labor. Everywhere capital and labor 
touch, and if they do not, one is as worthless as the other. 
Whether employed directly, or loaned to others for them to use, 
capital must be employed in union with labor, else it is abso- 
lutely valueless. The man who is worth a million is as poor as 
the man not having a dollar, and both must get a living by 
simple and similar tasks. As men will not do that — as they will 
use their capital themselves, or loan it to others to be used by 
them — they are bound to pay a reasonable reward to the laborer 
for his services. The workman is just as necessary a factor in re- 
production as capital, and rightfully stands upon an equal plane. 



THE PAYMENT OF LABOR. . 23 

Again, the capitalist asks : " Have I not a right to do what I 
will with mine own? If I throw my capital away, surely. I am 
under no obligation to employ workmen, for if I am, then all are 
bound to employ labor, whether having capital or not." If a man 
has nothing, he cannot be required to employ labor ; if he has 
property, he is bound to use it, either directly or indirectly, for his 
own support and for the support of others. Can a portion of such 
property be used as capital in reproducing wealth, then it is a duty 
he owes to society to employ it so, or spend it in other ways. 
Government, in protecting property, thus enabling its owner to 
accumulate more, puts him under obligation to employ a portion 
of it in reproduction, as well as to spend another portion in the 
maintenance of himself. He has no right to throw it away. He 
must use it himself, or loan it to others to be used by them. 
For, if he will not use it himself or let others use it, his property 
becomes worthless, and the State is obHged to support him. The 
State has the right to see that no man wastes his property so as 
to become a burden to the public. 

It is not necessary to go to this extreme length to defend our 
proposition. The truth is simply this — capital is utterly worthless 
unless joined with labor. Men are in fact bound to employ labor 
or else their possessions, whether great or small, are of no value 
to them or to any one else. Labor is just as necessary a factor 
in the saving and reproduction of capital, as in producing capital m 
the first place. Let it not be forgotten that in this whole discus- 
sion we are not talking of anything but labor, present and accumu- 
lated. Accumulated labor, to be worth anything, must be united 
with present labor; the two operate together. Consequently, the 
assertion is without foundation that the capitalist js under no obli- 
gation to employ labor. Such an obligation does exist. He has 



24 THE PAYMENT OF LABOR. 

no right to throw his property away. We assume that every man 
is desirous of saving his property; if so, he must employ labor, 
else his property becomes valueless. And if he must employ labor 
to save it, he ought to pay a fair compensation therefor. Sup- 
pose a man's house was in danger of being carried away by a 
flood, and some men coming along were asked to help in saving 
it. They have no time to make a definite bargain as to the 
remuneration, but engage with a hearty will, and by their efforts 
save the house. Would not every one say that the owner of that 
house was mean if he were not willing to pay those men a rea- 
sonable compensation for their services ? The position of the cap- 
italist is the same in respect to his property. His capital will 
vanish like a stroke of lightning unless united with labor. Analyze 
the uses made of capital, and all cannot help admitting the fact. 
Labor is necessary to save property and enhance its value; if the 
owners of lands, factories, etc., are desirous of securing these ends, 
they must employ labor. Therefore they ought to pay a reason- 
able price for it. 

As between workmen, there is a natural difference; one man is 
worth more than another, because he has greater strength or skill. 
It is right that the strongest and most skillful should receive 
higher wages. Concerning these natural advantages, there is noth- 
ing to be said. What we object to is the use of artificial and 
wrongful advantage. If the corn crop is less this year, the price 
should not be increased, except to require people to practice econ- 
omy, or for some other good reason. If laborers are plentiful, 
let them be paid as much; if they are scarce, let them work for 
the old prices. Let no advantage bp taken of unnatural, arti- 
ficial, or forced conditions, and all will be well. 



THE PAYMENT OF LABOR. 2$ 

It will be said that this mode of reasoning is contrary to the 
operation of supply and demand. Shall that law cease to be ap- 
plied ? No, not in the true sense. All that we have written 
about asking and expecting reasonable prices, does not conflict 
with the working of this law. There is, however, a wide difference 
between the natural and unnatural operation of supply and demand. 
Rightly interpreted, the law is this — demand is what people really 
need and would purchase if they could buy at a reasonable price ; 
and supply is the quantity that can be had at such a price. But 
the world is forever interfering with this law, by creating artificial 
scarcity on the one hand, and, on the other, by trying to make 
the demand less than it really is, so as to beat down the price. 
The law, to a great extent, does not express the truth about ex- 
changes. The real demand is often much greater than purchases 
indicate, and the supply also. But people deceive each other; 
they exercise force, they refuse to sell when they really want to, 
hoping for an advance of prices. The buyer refuses to buy, 
although he really wants the thing, hoping to get a reduction of 
price. So numerous are the deceptions practiced, the real state of 
things is covered up so deeply, that the natural law of demand 
and supply has, in fact, only a limited operation. 

What is a reasonable price depends upon many things. Obvi- 
ously, it is impossible to draw any hard and fast line defining it. 
The most we can do is to find out what principle should govern 
in making contracts between capitalist and workman. This is a 
reasonable price without regard to any advantage which either 
capitalist or laborer might take of the condition of the other. 

There are some considerations, however, that may be mentioned 
in making contracts for labor. First, the laborer should receive 
more where the work is hazardous to life and health, than in 



26 



THE PAYMENT OF LABOR. 



those occupations which are healthy and free from accident. An 
operative in a powder mill, or who makes certain parts of a brim- 
stone match, ought to receive higher wages than a person working 
in a woolen factory, which is comparatively healthy and safe. Sec- 
ondly, a person ought not to expect so much who receives regular t 
. employment as a person who cannot get work regularly. The 
ordinary hackman is justified in charging more for conveying pas- 
sengers, if he can get them only now and then, than if he were 
employed all the time. The same person will charge less by the 
hour if he is to be employed for several hours, than if employed to 
go a short distance, in proportion to the time required. This is 
just. With a great many who work in factories, especially in New 
England, they ought not to expect so much, because their em- 
ployers, in most instances, feel bound to give them constant 
employment if possible. Ofttimes they run, and at a loss, when 
they would not run, except to keep their help employed. Other 
considerations of less importance probably enter into the contract 
fixing the price of wages. 

There are some subsidiary questions surrounding the main one 
which require notice. It is said, that labor is paid enough gene- 
rally, whatever the price may be, because, as a class, workmen do 
not make a wise use of their wages. 

That workmen are often prodigal in the use of their wages will 
not be denied. Since the war, the wages of factory operatives 
have remained nearly the same as before, the prices of living have 
been reduced, consequently operatives have reaped a fine harvest. 
Some of them have saved their money, though the larger number 
have spent it all. The goods in the factory stores and villages 
have changed in many respects, which is the best proof of the 
extravagance of this class. The amount of jewelry they wear is 



THE PAYMENT OF LABOR. 27 

very large and expensive to what it was a few years ago. Their 
clothing, also, is costlier, and their living as well. 

Now, it is said, why pay them so much ? they do not make 
an economic use of their money ; teach them to use it properly 
before giving it to them. This, by way of advice, is good. Ope- 
ratives spend a great deal of money foolishly, and they should be 
taught to save it against a day of want, and for nobler uses. 
Yet is this a good defence to paying them higher wages ? 

The same mode of arguing will cut the manufacturer off from 
making money, for does he put it to any better use than his 
operatives? Is he not as extravagant, does he not spend as much 
money foolishly ? He cannot, in truth, say anything on that 
score. 

Thus we have gone over the ground between the capitalist and 
laborer, and sought to find out what is the true rule in the pay- 
ment of labor. We do not say that the fixing of any price is 
always best; a division of the profits upon some agreed plan is 
preferable, whenever a division is practicable. It is not practicable 
in every case, and when it is not, this rule has a decided prefer- 
ence over every other. How various plans for rewarding labor 
have succeeded, and what efforts workmen have made to increase 
the price of wages, will be considered in the next chapter. 



III. 



ON THE INCREASE OF WAGES. 



The history of the efforts to increase the price of labor is a 
very sad one. It is strewn with cruelty, injustice, and suffering. 
It is very instructive, however, and proves that amid the strifes 
and disappointments of contending parties, a better understanding 
has been created between them, and a nearer approximation to 
perfect justice, which will one day mark all their intercourse. 

Workmen seek to secure their claims in the following ways : 
by first combining into societies, called trades-unions, and then 
demanding higher wages by conference with their employers, by 
councils of arbitration, and by strikes. The other ways of secur- 
ing their rights are by forming industrial partnerships, and by 
abandoning the capitalist and forming co-operative associations. 
We shall consider, first, the methods of trades-union societies. 

It is the largest voluntary organization in the world.* The 

* The Amalgamated Society of Engineers in England, a branch of the trades-unions, and 
numbering about 35,000 members, has an annual income of $ 440,000. The expenditures of the 
society from 1851 to 1868 were as follows: 

Payments to members out of work ;^ 425,844 

Aids in sickness 161,388 

For old age 45,272 

For accidents 16,000 

For burials 50, 250 ' 

For extra fund for cases of special emergency 12,526 

Aids to other trades 10,375 

Total ;£ 721,655 



ON THE INCREASE OF WAGES. 29 

principal object of combining is to secure higher wages, while 
the incidental object is the support of workmen in sickness and 
destitution. The members are required to pay a certain sum per 
week to the organization, and this is expended in the support of 
strikers, sickness, etc. 

The aim of trades-unions more specifically stated is, first, to op- 
pose any reduction of wages; secondly, to cause a rise of wages 
whenever practicable; thirdly, to convert non-unionists into union- 
ists, either by persuasion or coercion, the former means being pre- 
ferred.* Besides these aims, they have sought to restrict their 
own competition in labor to certain limits deemed necessary to 
their welfare. The chief rules agreed upon to effect this object 
have been thus stated by Mr. Gostick :t " To insist on apprentice- 
ship; to contend for the employment of workmen and apprentices 
in a certain ratio of their respective numbers; to oppose frequent, 
or ' systematic ' working beyond the regular hours agreed on, and 
to prevent the employment of * piece-masters.'" | 

Leaving all other objects of the society out of sight except the 
principal one of raising the price of wages, workmen are entirely 
justified in uniting for this purpose so long as they pursue proper 
methods and do not make unreasonable demands. A considerable 
hostility has been displayed towards trades-unions, as they are con- 
sidered the enemies of the capitalist. In one sense they are. The 
object of their creation is to increase the price of labor — in other 
words, to get a larger share of the capitalist's profits, which, in 
most instances, he is unwilling to give. In England, especially, 
the greatest opposition to these societies has been exhibited. In 

* IVard's Workmen and Wages, p. 18. 

t Cobden Club Essays, p. 380, second series. 

♦ "This 'piece-master' is a foreman, whose extra gains sometimes depend on extra pressura 
put upon the labor of those who work under his superintendence. "—Gostick. 



30 ON THE INCREASE OF WAGES. 

this country, labor is better rewarded and is more content. It is 
in England that the laborer has fared worst, where the supply of 
labor is largest. Trades-unions have been more extensively organ- 
ized there than in any other country; in England has their power 
been most keenly felt. 

It is just as evident that laborers have a right to combine in 
order to get their dues, as capitalists have to combine for the pur- 
pose of resisting an advance of wages. As long ago as when 
Adam Smith* wrote, he said that " masters are always and every- 
where in a sort of tacit, but constant and uniform combination, 
not to raise the wages of labor above their actual rate. To vio- 
late this combination is everywhere a most unpopular action, and 
a sort of reproach to a master among his neighbors and equals." 

Mr. Thornton has reaffirmed the remark : " Large employers 
in any one extensive department of industry are not at all in the 
habit of competing with each other for labor. On the contrary, 
their custom is to deliberate together from time to time, in order 
to determine what wages it may, in existing circumstances, be 
advisable for them to offer, and some uniform rate is agreed to 
accordingly." t 

It was a long period before workmen in England were permitr 
ted to form these societies, so strongly entrenched were capital- 
ists in the legislation of the realm. In 1799, the following act of 
ParHament shows the willingness of that body to legislate against 
the combmation of workmen : " Contracts entered into for obtain- 
ing an advance of wages, for altering the usual time for working, 
or for decreasing the quantity of work (excepting such contract 
be made between a master and his journeyman), or preventing 
any person employing whomsoever they may think proper in their 

* Vol. I, p. 70, Rogers' ed. t IVesi. Rev., vol. 8i, p. i66, Am ed. 



ON THE INCREASE OF WAGES. 3I 

trade, or for controlling the conduct, or any way affecting any 
person or persons carrying on any manufacture or business, in the 
conduct or management thereof, shall be declared illegal, null and 
void."* 

This statute illustrates how workmen were regarded in that day. 
Nor was it until 1827 that Parliament repealed all statutes pro- 
hibiting workmen from combining. Until then, employers and 
Parliament had taken it for granted that they alone could regulate 
the price of wages. 

In having the right to combine acknowledged by Parliament, 
the cause of the workman was much advanced. He was for the 
first time put upon the same plane with the capitalist. They could 
now combine to work the price of labor up, as capitalists had 
hitherto combined to keep the price of labor down. 

In this country, happily, we have never been troubled with this 
question. So far as our National or State Governments are con- 
cerned, workmen have no just cause of complaint. They have 
always been placed upon the same footing as the capitalist, and 
have enjoyed the unquestioned right to form trades-union societies. 
It is not until recently that the old doctrine of the right of the 
State to control the price of labor has been revived. This desire 
has been expressed by Governor Brown, of Georgia. In his last 
annual message, he said that " labor must be controlled by law. 
We may hold inviolate every law of the United States, and 
still so legislate upon our labor system, or in Heu of that, estab- 
lish a baronial one." We imagine that there is no danger of the 
old English law being re-enacted on this republican soil. Liberty 
to contract for labor is too deeply grounded to be crushed out by 
the fiat of Gov. Brown, or by any one else of his way of thinking. 

* 40 George III, chap 90. 



32 ON THE INCREASE OF WAGES. 

In this country trades-unions are of less account, because work- 
men, as a general thing, are well paid. So long as there is so 
much unimproved land to be easily had, the claims of labor 
will get a fair hearing. The western prairies are an asylum to 
which the laborer may, at any time, fly from the face of his op- 
pressors. 

Three ways there are, as we have said, by which trades-unions 
seek to get an advance of wages: by conference with their employ- 
ers, by councils of conciliation, and by strikes. Concerning the 
latter mode we will speak first. 

Strikes, which in the fourteenth century had their counterpart in 
the Jacquerie riots, are the last thing for the laborer to resort to 
in order to get an advance of wages. As for the justice of them, 
if workmen are not getting a reasonable price for their work, and 
their employers refuse to pay more, after working the length of 
time agreed upon, they are justified in quitting their places. That 
is all there is in the phenomena of strikes, refusal to work unless 
an advance be paid, and the workman has a perfect right to de- 
mand such a price and to quit working unless the advance be of- 
fered.* 

In England, and we believe the same is true in this country, 
workmen, generally, have oftener struck to resist a fall than to 
secure a rise of wages. Says Mr. Brassey,! " Resistance to a pro- 
posed reduction was the cause of the engineers' strike in 1852; of 
the strike at Preston in 1853; of the strike in the iron trade in 
1865 ; and of the strike of the colliers, at Wigan, in 1868. In 

* Mr. Thornton has considered the ethics of strikes fully in a paper published in the West. 
Rev. upon Strikes and Industrial Co-operation; vol. 81, pp. 165 — 67. Some able and interesting 
observations upon this subject are contained in a paper by Fredertc Harrison entitled The 
Iron-Masters' Trades-Union, Port. Rev., vol. i, p. 96. 

■* Work and Wages, p. 6. 



ON THE INCREASE OF WAGES. 33 

each of these cases, the masters had found it necessary, in conse- 
quence of the depressed state of trade, to reduce the rate of 
wages : but the men, ignoring the circumstances of the trade, and 
looking only to what they believed to be a degradation of their 
position as workmen, refused to accept the reduction." 

Although in many cases workmen have failed to get higher 
wages, yet not always. One of the principal reasons given for 
Great Britain's failure to supply iron manufactures to this and 
other countries, is the very large advance in the price of labor 
occasioned by the strikes of trades-union societies. The London 
Times* in a recent editorial on the decline of the English iron 
trade with the United States, remarked that the price of iron 
depended very materially upon the price of coal. Anything that 
raises the price of coal affects the price of iron. " Now," says 
that journal, " without pronouncing judgment on the disputed ques- 
tion whether strikes have been the exclusive cause of the late rise 
of coal in England, we may take it as granted that they have 
been a very principal cause, and that they are now exercising 
a controlling influence in keeping up the admittedly excessive 
price." 

Strikes, in this country, have not been very serious or long pro- 
tracted. They have occurred in almost every branch of trade; in 
the cotton and woolen mills, among the coal mines, engineers of 
railways have occasionally struck, masons, carpenters, printers, and 
others. The coal-mine strikes have been the most extensive and 
expensive of any. Mr. Thornton has summed up the result of 
some of the numerous strikes in England, happening within the 
last twenty-five years, but a detailed account of them, and many 
others besides, will be found in WanVs Workvieii and Wages. We 

' Aug. 29, 1873. 

4 



34 ON THE INCREASE OF WAGES. 

shall merely mention the great strike of the Manchester spinners 
in 1829, when $1,250,000 wages were forfeited; the Ashton and 
Staleybridge strikes of 1829 and 1830, participated in by 30,000 
spinners and who lost $1,250,000; the strikes of the Tyne and 
Wear pitmen in 1832, which were very protracted; the Manches- 
ter builders' strike in 1833, when $360,000 of wages were lost; 
the "terrible" strikes of the Preston spinners; first, in 1836, lasting 
thirteen weeks and costing the men $286,000; and secondly, in 
1854, when 17,000 persons went into voluntary idleness, suffering 
intensely for thirty-six weeks, and giving up $2,100,000 wages; 
the engineers' strike in 1853, of fifteen weeks' duration, in which 
$215,000 wages were sacrificed; the strike in the metropolitan 
building trade in i860; and the strikes of the iron workers of 
Staffordshire and the North in 1865, and of the London tailors in 
1868; these are a few of the more prominent instances. 

Before resorting to strikes, workmen, in many cases, seek to 
settle their differences with their employers by arbitration. Oft- 
times a hearing is had, both parties state their claims, and the 
arbitrator renders a decision, which is accepted as final by both 
parties. These courts of conciliation have been the authors of an 
immense amount of good, and prevented numerous strikes. The 
employer, by coming forward at these times and making a full 
showing of his business — what he can afford to pay and what not 
— ^has saved both himself and his workmen from many a rupture 
and loss of work and profits. 

This mode of settling disputes between employer and employed 
originated in France, and is there termed Conseils des Prud'- 
hommes. They are established by decree of government, and 
consist of a president, vice-president, who can be neither workmen 
nor employers, and six members elected by both classes. The 



ON THE INCREASE OF WAGES. 35 

proceedings are inexpensive, the judges not being paid; and a 
delegation of the council, coi,isisting of one employer and one 
workman, sit in judgment almost daily. " The result," says 
Brassey,* "in ninety -five out of one hundred cases brought 
before these tribunals, is a reconciliation between the parties; and, 
though appeals are permitted to the superior courts of law, they 
are rarely made. ... In 1850, 28,000 disputes had been 
heard before the Conseils des Prud'hommes, of which no less than 
26,800 were satisfactorily settled." 

Little has been said about the establishment of courts of con- 
ciliation in this country, yet they have produced so much peace 
abroad, that, were the tribunal established here, it probably would 
yield the best results. When a division between the two classes 
has actually broken out, these courts can do little, perhaps, to 
make peace; but if they are instituted early enough, they are 
likely to save many a bitter and expensive contest between the 
capitalist and his workmen. 

Having shown how the workman seeks to increase his wages by 
strikes, we turn to another side of the same subject to present the 
experience of improving his lot by co-operation. This is of two 
kinds : first, co-operation of workmen simply ; secondly, co-opera- 
tion with capitalists, which latter method of conducting business is 
termed an industrial partnership. We shall not tarry long with 
either of these topics and do little more than point out a few 
results, for the history of these movements has been related so 
many times, that the public are quite well informed of it already. 

The birth of the first co-operative society occurred in Rochdale 
nearly thirty years ago. The organization was called the Rochdale 
Pioneers. The history of the society has been told in a most 

* IVork and ]Vage^ p. 272. 



36 ON THE INCREASE OF WAGES. 

attractive way by Mr. Thornton in his work On Labor. The 
rise of this society was like the growth of a mustard seed. In 
the beginning, twenty-eight flannel weavers, disgusted with the 
poor quality and outrageous price of the provisions they were in 
the habit of buying, subscribed two and three pence a week to- 
wards making up a sum of twenty-eight pounds, which they spent 
in purchasing, at wholesale prices, in Manchester, flour, sugar, 
butter, and oatmeal. From this common stock, each took what he 
wanted at the current prices, paying in cash; and when the whole 
amount had been sold, they were surprised to find that so much 
had been made by the operation. They repeated the experiment. 
They purchased in larger quantities and added to their subscribers. 
The embryo association was laughed at in the beginning, but it 
continued to grow, and after a short time it was found that a 
room was necessary to hold the goods purchased. A small one 
was hired, and it was arranged that one of their number should 
act as salesman for a few hours during two evenings in the week. 
In 1845, the second year of the society, the number of sub- 
scribers had increased from twenty-eight to seventy-four, and the 
capital was ^^181, upon which a net benefit of ^32 had accrued. 
The two following years they divided ^80 and ^T]; and they 
have gone on increasing at a wonderful rate ever since. In 1847, 
linen and woolen drapery was added to the original grocery and 
chandlery business; in 1850, a butcher's shop was grafted on; 
shortly after, a slaughter-house; in 1852, shoemaking and tailoring 
were begun. A single glance at the profits tells the story of prog- 
ress. We have not space for all the figures ; we will simply 
show what they were at the end of each period of five years. 
The society was started in 1844, and the net profits run as 
follows : 



ON THE INCREASE OF WAGES. 37 

1845, ^22 .... 1S48, ;^II7 .... i860, ^15,906 

1846, 80 1849, 561 1865, 25,156 

1847, 72 1850, 880 1867, 41,619 

1855, 3,106 

The causes of their success are very clearly seen. They bought 
at wholesale, and always paid in cash, thus getting the largest 
discounts. They never sold on credit, and consequently had no 
bad debts. Having a large number of shareholders, they were 
assured of plenty of customers, and were under no necessity of 
spending a penny to make themselves known in order to obtain 
trade. The expenses of management were small, not exceeding 
two per cent, of the business done. For attracting outsiders, their 
equitable distribution of profits was a device far more efficacious 
than a showy front or advertising. 

When any one makes a purchase, he receives a tin ticket, 
whether a member of the association or not, denoting the sum he 
has paid. At the end of every quarter, when profits are declared, 
there is a deduction of five per cent, per annum, for interest on 
the capital, another deduction of two and one-half per cent, as 
an education fund is taken out, and the balance is divided 
among the holders of the tickets. 

There are some very decided benefits arising from this form of 
co-operation. First, one's money goes farther than anywhere else; 
secondly, the stores give the best possible security to the pur- 
chaser that what he .buys will be of the best quality, since it is 
the same as the owners of the concern purchase for themselves. 
Upon these points Mr. Holyoake * has justly said : " The whole 

* Self-Help, pp. 38-9. He also says: "They have no interest in chicanery. Their sole duty 
is to give fair measure, full weight, and pure quality, to men who never knew before what it 
was to have a wholesome meal, whose shoes let in water a month too soon, whose waistcoats 
shone with devil's dust, and whose wives wore calico that would not wash. These men now buy 
in the market like millionaires, and, as far as purcness of food goes, live like lords. They make 
their own shoes, sew their own garments, and grind their own corn. They buy the purest sugar 



38 ON THE INCREASE OF WAGES. 

atmosphere of a store is honest. In that market there is no dis- 
trust and no deception — no adulteration and no second prices. 
Buyer and -seller meet as friends. There is no overreaching on 
the one side, and no suspicion on the other." 

Besides supplanting dearer and poorer shops, co-operative stores 
stimulate to self-amendment and promote prudence. The poorer 
class, considering the means they have, are not infrequently quite 
as wasteful and extravagant as others ; but these societies have a 
most beneficial effect in the way of elevating all concerned, and 
making them prudent and more self-reliant men.* 

The other form of co-operation is that of industrial partnership. 
This is the more natural method, because capital is brought in to 
the aid of labor.t 

The idea of an industrial partnership is for the capitalist to 
give the workmen wages, a sum rather low, enough to sustain 
themselves by living prudently, and then, after deducting a certain 
sum for the use of the capital, to divide the rest of the profits, if 
any there be, upon certain terms agreed upon between the em- 
ployer and his employees. The most successful industrial estab- 
lishments in Great Britain are the Methley collieries, owned by 
Henry Briggs, Son & Co., and several slate quarry organizations 
in Wales. I The first of these organizations is worthy of a brief 
description. The business of the proprietors was undertaken in 
1852. For the next twelve years their relations with their men 

and the best tea, and grind their own coffee. They slaughter their own cattle, and the finest 
beasts of the land waddle down the streets of Rochdale, for the consumption of flannel-weavers 
and cobblers." 

* An article by Piof Fawcett upon the Position and Prospects of Co-operation, in the 
February No. of Fort. Rev., 1874, is worth reading in this connection. Also one by Thomas 
Hughes upon The Working Classes of Europe, hiter. Rev., March, 1874. 

i In Germany, workmen form associations and the State and banks loan them money to 
be used in the prosecution of their businebs. This is also done by the French Government to 
a limited extent. 

X For a description of the slate quarries see Cairnes' Essays on Polit. Econ., p. 166. 



ON THE INCREASE OF WAGES. 39 

were most unsatisfactory, and strikes were constantly occurring. 
In 1865, they launched their experiment of an industrial partner- 
ship. The business of the firm was transferred to a joint-stock 
company, the owners retaining two-thirds of the shades, and offer- 
ing the other third to the public, and especially inviting their em- 
ployees to become shareholders. At the same time they arranged 
" that whenever the divisible profits accruing from the business, 
after a fair and usual reservation for redemption of capital and 
other legitimate allowances, exceeded ten per cent, on the capital 
embarked, all those employed by the company as managers, 
agents, or work-people, should receive one-half of such excess 
profit as a bonus, to be distributed among them as a per centage 
on their respective earnings during the year in which such profit 
should have accrued." 

They made no claim to disinterestedness; they adopted the sys- 
tem as one of convenience and speculation. Their profits had 
never exceeded ten per cent., and these they were sure of receiv- 
ing before there was any division to the employees. 

The undertaking proves that the Briggs reasoned well. The 
experiment has been a brilliant success. All the expectations 
based upon it have been reahzed, and some unlooked-for advan- 
tages have accrued. The trial began July i, 1865. "At the end 
of the first twelve-month the total of profits was found to be 
fourteen per cent., of which the shareholders took twelve and the 
work-people two per cent. In the second year the total was six- 
teen per cent., the shareholders getting thirteen per cent, and the 
workpeople three. In the third year the corresponding figures 
were seventeen and three and a-half." * 

Industrial partnerships are the consummate flower of the war 

* Thornton On Labor, p. 352. 



40 ON THE INCREASE OF WAGES. 

between labor and capital. Men like profits better than salaries. 
We suspect this is the outcropping of the speculative or gambling 
spirit which every person displays in some degree. It is only 
fair, though, since workmen add their full share to the increase of 
capital, that the division of such increase be equitable. It is the 
best stimulus to workmen — they put forth their best energies — and 
it is the fairest mode of conducting business whenever possible. 
The whale fisheries have always been conducted on this principle. 
It is worthy of more attention than it has received, for it reveals 
the true relationship that should exist between the capitalist and 
the workman. They join hands, brains, and strength, for the same 
common end, to produce more wealth, and to make a fair division 
thereof between them. 

The unity of the relation between the two classes is being more 
clearly seen, and the enmity between them is slowly, but surely, 
disappearing. Can we not see in vision as Thornton has seen— 

" * * * of shadows thrown before 

Coming events, things that surely be, 
Nor now delayed, but until man, no more 

Wholly on blinding lust intent, shall see 
That his whole interest and his kind's are one, 

Blended in individual destiny." . 



IV. 



EFFECT OF MACHINERY ON LABOR. 



Wealth is increased in one of three ways — by transmutation, by 
transportation, and by transformation. The first way is that of the 
agriculturahst ; the second of the merchant and carrier; the third, 
the manufacturer and mechanic's. 

In each of these three ways, the most important principle, 
especially in the latter way, of increasing wealth, is by the proper 
division of employments. This portion of the field of political 
economy has been fully explored by able writers, though perhaps 
no one since Adam Smith has made so many discoveries in it 
as Charles Babbage, in his Economy of Manufactures. Among 
the three advantages of dividing employments mentioned by Smith, 
is the invention of machinery. Some of the effects, direct and 
remote, flowing from its use may be noticed, as they have not 
been fully described. 

One effect is the continued hostility on the part of workmen to 
the introduction of all machinery superseding labor. This hos- 
tility is nothing compared to what it was in former times. " Yet 
there are a considerable number of the working-classes who have 
a lingering, lurking dislike to machinery, which they cannot ration- 
ally explain, and who look with the liveliest apprehension at any 
improvement which may be effected in that grand aid to human 



42 EFFECT OF MACHINERY ON LABOR. 

industry." * Mr. WAKot intensifies this truth by referring to the 
riot at Coventry, England, which arose from the attempt to apply 
steam-power in the manufacture of ribbon; and to the opposition 
at Northampton, Kettering, and WeUingboro', over the introduc- 
tion of sewing-machines in the manufacture of boots and shoes. 
Another good authority has affirmed that hundreds of inventions 
are not utihzed because trades-unions are opposed to their use, and 
are powerful enough to have their way. Millions of bad bricks 
are made annually, because this society will not permit the use of 
brick-making machinery. No spirit of injurious opposition to the 
use of labor-saving machinery has appeared in this country, nor 
has any occasion happened to rouse opposition, as there has 
always been a flood-tide of work for every one. May this spirit 
always prevail here, for the sake of the workman and all. 

It cannot be denied that labor-saving machinery displaces labor. 
It must do so during some period of its use else the name is a 
.false one. As a railway engine will do the work of many horses, 
thus superseding the use of the noble animal, so the horse has 
superseded the work of thousands of men, because, in many ways, 
it can accomplish more. 

The invention of machinery has been more wonderful in this 
country than in any other. This is owing, principally, to the 
scarcity of labor, though partly to the greater skill of the mechan- 
ics. It is worthy of note how the strikes in England are leading 
the manufacturers to develop more perfectly the use of machinery 
there. This was mentioned by Mr. Nasmyth, a noted English 
manufacturer, in his evidence given before the Trades-union 
Commissioners. His desire to invent labor-saving machinery was 

* Edmund Potter ; paper read at Social Science Meeting, Glasgow, 1868. 
t Workmen and Wages, p. 240. 



EFFECT OF MACHINERY ON LABOR. 43 

increased by a strike, in 185 1, affecting his business. By new- 
contrivances invented since that time, he had been able to reduce 
the number of men from fifteen hundred to one-half as many. 

" That machinery does not diminish, but enlarges the field of 
employment," says one author, " is a thesis which he would be 
ashamed to argue." We are sure the statement cannot be received 
without explanation. Did no new cause operate upon the intro- 
duction of machinery except a reduction in the price of the pro- 
duct, the field of employment would certainly be diminished.* 
Let a machine be invented by which half the labor required to 
make a particular thing is displaced. Let the future price of it 
be reduced in proportion to the diminished cost of manufacture. 
Will the demand double so that the men first thrown out of em- 
ployment will be subsequently employed in the same business ? 

* The economy often wrought through the use of machinery is remarkable. During the re- 
cent war, the EngHsh developed their machinery for making fabrics more than ever before dur- 
ing the same time, and reduced, to a considerable extent, the amount of labor required to run 
it, as the following table shows: 

' Cotton Factories. 

1856. i86r. 1868. 

No. of Factories 2,2ro 2,887 2,549 

No. of Spindles 28,010,217 30,387,467 32,000,014 

No. of Power Looms 298,847 399.992 379-329 

No. of Persons Employed.. 379,213 451,569 401,064 

Woolen, Worsted and Shoddy Factories. 

•1856. 1861. 1868. 

No. of Factories 2,030 2,211 2,465 

No. of Spindles 3,111,521 .... 3,471,781 .... 6,455,879 

No. of Power Looms 53,399 64,818 ... 118,865 

No. of Persons Employed.. 166,885 173,046 253,056 

Flax, Hemp and Jute Factories. 

1856. i86i. 1868. 

No. of Factories 417 •••- 44° 472 

No. of Spindles 1,288,043 .... 1,252,236 .... 1,679,357 

No. of Power Looms 8,689 • • • ■ i5>347 • • • • 3S,o47 

No. of Persons Employed. . 80,262 .... 94.o°3 •••• i35,333 



44 EFFECT OF MACHINERY ON LABOR. 

By no means. In fact, if such a saving in the cost of production 
takes place, a long period ensues, generally, before the purchaser 
gets the full benefit of the improved machinery. 

It does not follow, though, that the workman fares worse, in 
the end, from the introduction of machinery. The fruit of his 
brain is not bitterness to his body. By inventing machinery and 
economizing labor, he does not dig his own grave. Far from it. 
Labor is released, by the use of machinery, for a season; after- 
wards, it all returns. 

In what way ? By cheapening the price of products, and, 
from the increase of national wealth, the demand is enlarged.* 
Hence, a larger supply must be had. It is this second cause 
joined to the first which crowds the demand, in many things, upon 
the heels of the producer as sharply as ever. When the sewing- 
machine was invented, it was believed that thousands of women 
would thereafter find no work. What has happened? First, a 
larger amount of clothing is demanded, because the cost of mak- 
ing it is less; secondly, the amount of sewing upon some things 
has largely increased; thirdly, there is more wealth with which to 
pay for clothing and sewing. Has the invention of the steam en- 
gine driven men out of employment ? Whether in transportation, 
or other business, it has been the means of multiplying the de- 
mand for labor. Not only do workmen continue to be employed 
since the introduction of machinery, but also at better rates; while 
others find work, because sOme of the processes of production are 
greatly simplified. Workmen can be employed to make parts of 
locomotives which once were made only by artisans. Thousands 
are employed in factories for making cloth, who never would have 
been employed if all the processes of making were undertaken by 

* Thornton, on Labor, p. 319. 



EFFECT OF MACHINERY ON LABOR. 



45 



one person. Machinery has introduced an infinite number of sim- 
ple processes. 

In respect to the increased pay derived from working machinery, 
it is difficult to give figures without a great deal of explanation, 
because the price of wages has been increased from other causes 
besides this.* 

From these, and many other facts, it is clear that machinery is 
not the enemy of workmen. Let the opposition to its introduction 
cease. May the workman continue to apply his skill in producing 
new machinery and in running the old, with the confident hope 
that he is sure of earning his bread and robbing no one of it, not 
less when he works with the mute wisdom of machinery, than 
when wearing out his own fingers. " No trades-unions," says Ed- 
mund Potter, " ever encouraged invention." This is a sad fact. 
Machinery has brought a thousand comforts to millions who would 
otherwise have been denied them, and what workman to-day can 
trace his lack of employment, if out of it, to the introduction of 
machinery ? 

It may be asked, will not the augmented power of machinery 
ultimately reduce the quantity of labor. We think not. It cer- 
tainly will in particular employments, but the labor thus released 
will take up new occupations. The demand for most things has 



* In Porter's Progress of the Nniioii, p. 197, he gives an interesting table of the prices of the 
wages of spinners, and their cost of living for a long period, which we quote : 

Week's Net earnings 
Horns oj Flour Flesh 

work per sack. per lb. 

per 7ueek. 



Work 0/ Spinner. 
Years, per week. 

Lbs. Nos. 



1804, 


12 


180 


1804, 


9 


200 


1814 


18 


180 


1814, 


i3J^ 


200 


1833 


■z-^% 


180 


•833 


'9 


200 



Wages 

per -week. 

s. d. 

32 6 
36 6 
44 6 
60 o 

33 8 
42 9 



74 
74 
74 
74 
69 
69 



Flour 
per sack. 
s. d. 
83 o 
83 o 
70 6 
7D 6 
45 o 
45 o 



would purchase 

Lbs. Lbs. 

Flour. Flesh. 



td. to ^d. . 
6 to 7. 



117 
124 
175 
239 
210 



62I4 

73 

67 

90 
67 
85 



46 EFFECT OF MACHINERY ON LABOR. 

a practical limit, and when production reaches that, it must stop. 
That over-production is not possible in all branches of industry at 
once, though possible in some, is a doctrine which few, if any, 
will deny. But human wants cannot cease entirely so long as 
man lives. 

Another effect springing from the invention and use of ma- 
chinery is the rise of large factories.* Machinery first diminishes 
labor and increases gains, unless the price of the thing sold is re- 
duced correspondingly with the diminished cost of production. 
Sometimes, a manufacturer prefers to sell at the old price and in- 
crease his profits in that way ; sometimes, by reducing the price and 
stimulating the demand. His preference will be for " that way 
which is likely to yield him the greatest profits. If the demand 
increases, as in many things it does, whether prices are reduced 
or not, the manufacturer enlarges his factory to produce more and 
enhance his profits. This, of course, does not logically follow, but 
if a business is profitable in the beginning and machinery is in- 
vented whereby the profits are increased, generally the manufac- 
turer increases his capacity for production to that point where he 
can manufacture at the greatest profit; extending his business so 
far as to be dependent upon the smallest number not employed by 
himself in producing his wares. For example, some of the rail- 
roads are constructing rolling mills to produce their own rails, be- 
cause it is cheaper than to buy of others. This practice of extend- 
ing the manufacture of things so as to cover as many processes as 
possible, is growing every day. A lock manufacturer, for example, 
instead of purchasing his castings of another, will make them him- 
self. And thus the process goes on of combining more and more, 
under the ownership of one person, the different processes involved 
in a given product. 

* See IVest Rev., vol. 8i, p. 164, Am. ed. 



EFFECT OF MACHINERY ON LABOR. 47 

It is not within our purpose to state how far this combination 
of processes has been carried, but simply the effect of it, both 
upon workmen and the pubhc. 

One effect is a tendency to diminish the price of manufactured 
products. Why does the lock manufacturer make his castings in- 
stead of purchasing them of the foundryman ? Either, because he 
can make better ones at the same price, or similar castings at a 
lower price. In short, because he can save money by the opera- 
tion. If he can, he can afford to sell his wares at a reduced 
price. Whether he will or not depends upon the state of facts 
previously indicated — whether he can make more by selling the 
same quantity at larger profits, or a larger quantity at profits re- 
duced. A combination of processes generally tends to a reduction 
of the price of things. 

Again, if the price is not diminished in the first instance, the 
great gains realized tempt others to rush into the business, unless 
it be a legal monopoly, and, through force of competition, prices 
are diminished. 



y. 



ON THE MEANING AND CAUSES OF 
VALUE. 



The saying is reported of Prodicus, the master of Socrates, 
that " a right use of words is the beginning of knowledge." Yet 
words rightly used are very imperfect signs to express ideas. The 
same words, phrases, and sentences convey dissimilar notions to 
different persons and there is no way of overcoming the difficulty. 

Words are absolutely necessary for the conveyance of ideas, and 
a definition is nothing more than a combination of them. How- 
ever imperfect, therefore, definitions may be, no progress in the 
acquisition of knowledge can be made without them. 

Acting upon the principle enunciated by Prodicus, the Greek 
school of sophists, led principally by himself, Protagoras, and 
HiPPiAS, devoted themselves to the study of words with great 
assiduity, and the flowering of this impulse is found in the works 
of Aristotle, whose terminology is exceedingly clear.* Great 
attention was paid to this subject till the time of Descartes, who 
went to the other extreme and declared that words had no fixed 
meaning at all.t 

* See Grant's Aristotle, vol. i, pp. 8i-g. 
^ Hallam, Lit- of Europe, vol. i, loi. 



ON THE MEANING AND CAUSES OF VALUE. 49 

A complete dictionary would comprise the smn total of human 
knowledge. Such a work is like a great field, each word answer- 
ing to a lot, and the entire number of lots comprising the whole 
field. Now, as additional fences may be built, or old ones pulled 
down, so that the lots may become smaller or larger, words may 
be defined as having a narrower or wider meaning. Indeed, one 
might continue to widen the meaning of a word till the whole 
circle of human knowledge was embraced within it. 

Let the reader think this subject over carefully and he cannot fail 
to reach the conclusion that a definition is an elastic thing, stretched 
by one and contracted by another — an arbitrary proceeding which 
cannot be changed. The most that can be said for the definition 
of a thing is, that more persons will define or describe it in one 
particular way ; it is the number and quality of noses assenting to 
a given definition which render it more authoritative than another; 
but there is no test by which a definition can be declared true, 
whatever be the authority assenting to it. Yet the farmer must 
fence his land to indicate where it is, so words must be defined, 
bounded, to give them any significance. 

As value is the root-term of economic science, it is necessary to 
define the meaning in which it is to be used. Whether corres- 
ponding to the meaning given by others or not, such a course is 
necessary in order to make any progress with the several topics 
we propose to consider. Were this not done, we should be as 
completely lost as a ship at sea upgn a starless night, without 
compass or guide to point the way. 

Although the term " value " plays a most conspicuous part in 
political economy, yet many economic writers have neglected to 
define it carefully, as though the term were of little importance. 
In consequence of this neglect, they have greatly multiplied the 

5 



50 ON THE MEANING AND CAUSES OF VALUE. 

errors to be found in this department of study, which were nu- 
merous enough before. 

At the outset, we remark that value is not a quahty inhering in 
any object whatever. This truth will appear very clearly from 
Professor Perry's illustration. " If I take up a new lead-pencil 
from my table, for the purpose of examining all its qualities, I 
shall immediately perceive those which are visible and tangible. 
The pencil has length, a cyHndrical form, a black color, is hard to 
the touch, is composed of wood and plumbago in certain relations 
to each other, and has the quahty, when sharpened at the end, ot 
making black marks upon white paper. These qualities, and such 
as these, may be learned by a study of the pencil itself. But can 
I learn, by a study of the pencil itself, the value of the pencil ? 
Is value a quality ? By any examination of its mechanical, or by 
any analysis of its chemical, properties, can I detect how much 
the pencil is woT-th ? No. The questioning of the senses, how- 
ever minute, the test of the laboratory, however dehcate, applied 
to the pencil alone can never determine how much it is worth."* 
Value, then, is not a quality of a thing. • It c^n never be found 
in any object. The mistakes of economists who have not kept 
this truth clearly in view have been most deplorable. 

Before going further towards finding out the meaning of value, 
let us stop to define utility. This is the capacity of an object to 
satisfy the desire of its possessor. But the utility here meant is 
not "that utility which is determined by reason and measured by 
a philosophical standard."! If an object has capacity to satisfy 
the desire of its possessor, however strong or weak, however de- 
praved or elevated the desire may be, that object has utility. In 
this sense of the word, which is the etymological one, ardent 

* Elements of Polit. Eco7i., p. 46. t Bowen, Aiu. Polit. Econ., p. 72. 



ON THE MEANING AND CAUSES OF VALUE. 5 1 

spirits have utility tlie same as wheat. An obscene book, so long 
as it satisfies desire, has utility, — like the Bible which satisfies the 
longifig of many a soul. The same thing may have no utility 
to one man, a low utility to another, and a very high utility to a 
third. That is, it has no capacity to satisfy the desire of the 
first, a slight capacity to satisfy the desire of the second, but a 
very high capacity to satisfy the desire of the other,* 

Utility must be carefully distinguished from exchangeability. 
Utility is the capacity of an object to satisfy the desire of its 
owner ; exchangeability is the capacity of an object to satisfy the 
desire of one not the owner, combined, also, with his ability to 
purchase it. Hence, an object may have utility even though no 
one besides the owner ever hears of its existence; an object never 
has exchangeability unless known to and desired by another. 

An article may possess both exchangeability and utility. This 
is often the case. Thus gold is exchangeable, for it may be 
desired by another; and also useful, for the owner may wear 
it as ornament or otherwise, or manufacture it into watches, 
jewelry, and the like. Having cleared up the meaning of these 
terms, let us proceed on our way towards defining value. 

When Robinson Crusoe recovered from his shipwreck, he found 
that he was the sole owner and occupant of a comfortable and 
fertile island. There was abundance for food and clothing; he 
easily provided himself with a house for shelter and habitation. 
Yet all these possessions had no value. They had utility, for they 
could satisfy his wants. Indeed, they were quite as useful to 
him as if he and they had been in England. Their utility was 
great, their value nothing ; why did they not have value ? The 
presence of some other person was necessary having exchangeable 

* See Perry's El. 0/ Folit. Econ., p. 72. 



52 ON THE MEANING AND CAUSES OF VALUE. 

objects, and wanting also some of Crusoe's 'things ; and further, 
an exchange must have actually taken place before the com- 
modities of either person could have had any value. If people 
living in the same community, and owning different commodities, 
never exchanged them with each other, such commodities would 
have no value. Commodities cannot have value unless their 
owners exchange them with one another for those things which 
they desire, but have not. Consequently, Crusoe's possessions had 
no value, because he owned everything and was alone. If another 
person had lived there, having various things Crusoe wanted, and 
which could have been obtained by exchanging a part of his own 
for them, then the values of the several commodities exchanged 
could have been ascertained. Hence we find that the value of a 
commodity is an estimate agreed to between the person parting 
with and the person receiving it. 

In what words or terms is this estimate or value expressed ? 
A has a hat and B a pair of shoes. Each wishes to exchange 
his product for that of the other. After considerable discussion, 
in which A declares that he ought to have more than the shoes 
for his hat, it is agreed that each shall exchange his product for 
that of the other. The value of the hat, therefore, is expressed 
by the shoes ; thus the hat is said to be worth the pair of shoes ; 
and, likewise, the shoes are worth the hat. The value of each 
product is expressed by the other. Thus, our conception of value is 
now complete, and may be expressed in the following manner: 
Value is the estimate agreed to between the person parting with, 
and the person receiving a commodity, expressed in some other 
commodity that is exchanged for it.* 

* When one commodity is exchanged for another, each measures the value of the other. — 
y. R. McCuUock, Encyc. Brit, Art. Money. 



ON THE MEANING AND CAUSES OF VALUE. 53 

This definition of value will be easily apprehended. It will be 
seen that value does not reside in a commodity ; it is an estimate 
or affection of the mind. It is not an estimate made by one per- 
son, however, but by two or more — by all the parties owning the 
several articles that are exchanged. Nor is an estimate ever the 
value of anything unless an exchange actually takes place. 

Hence, an ex parte estimate, i. e., the estimate of one person, 
or the estimates of persons who are not the owners, can never be 
considered as the value of anything. True, we can tell what the 
value of a commodity was at the time of the last exchange, as ex- 
pressed in the commodity exchanged for it. We can tell what it 
probably will exchange for at some future time. And this is our 
meaning when we say that a commodity is worth a certain sum 
or thing. We mean that it was exchanged for some other thing, or 
can be exchanged for it at some future time. So the merchant, 
conscious of this truth, can calculate with a reasonable degree of 
certainty upon the wants of his customers, and what he can prob- 
ably get for his goods. And because the values or estimates 
men put upon things undergo but litde change they can buy and 
sell, and engage in commerce in the most distant parts of the 
earth. Yet how often men fail to discern the varying and capricious 
values or estimates that will be put upon things, is a matter of 
common experience. 

MACLEOD has done much to clear up the meaning of value, yet 
he has made some mistakes. Thus, he says that, " however much 
a person may wish to sell any product of his own, yet, if no one 
will buy it, it has no value. If an exchange takes place, it can 
only do so from the reciprocal desire of each for the product of 
the other. Hence, it is clear that value necessarily requires the 
concurrence of two mifids.'"* It is a little singular, however, that he 

* Theory and Practice of Banking, vol. i, p. 14. 



54 ON THE MEANING' AND CAUSES OF VALUE. 

should have written the following sentence just before those quoted : 
"■We may observe that since a thing which cannot be exchanged 
has no value, the value of anything depends not upon the per- 
son who offers it for sale, but upon the desire of the purchaser." 
Is not this equivalent to saying that the value of a thing de- 
pends upon the desire of the purchaser ? And is not this state- 
ment directly opposed to the one previously quoted, namely, 
"that value necessarily requires the concurrence of two minds, 

and that if an exchange takes place, it can only do 

so from the reciprocal desire of each for the product of the 
other " ? Before an exchange can take place, there must be a 
meeting of minds; which person has the strongest desire to- ex- 
change is often difficult to tell, for each generally tries to conceal 
his desires in part, at least, in the hope of making a better ex- 
change. Suppose the purchaser is in great want of bread, and the 
seller knows it, will not the latter use his information to increase 
the value or estimate of his bread ? Or suppose a dealer has 
some article on hand like perishable fruit, which he is very 
desirous to dispose of, will not the purchaser often use his 
knowledge to reduce the value of the fruit ? Consequently, the 
statement is a mistake that " the value of anything depends, not 
upon the person who offers it for sale, but upon the desire of the 
purchaser." It depends upon the desires of both; which of them 
has the strongest or weakest desire cannot easily be told. 

An invariable standard of value is impossible. For, supposing 
that the values of two commodities have changed relatively to 
each other since a former exchange, in which commodity has the 
change taken place ? Thus, suppose a bushel of wheat was ex- 
changed for a dollar of gold last year, and that two bushels must 
be given for a dollar this. Has the gold risen in value or, that of 



ON THE MEANING AND CAUSES OF VALUE. 55 

the wheat decHned ? It is no nearer the truth to say that the wheat 
has dechned than that the gold has risen. Suppose that ten com- 
modities have each been exchanged for the same amount of gold 
for a hundred years. This year, however, one of them, sugar, for 
example, is exchanged for twice as much gold as ever before. Has 
sugar, therefore, risen in value, or has the value of gold declined ? 
Put any examples you like, it will always be found that value is a 
relative expression, and, consequently, that no object can ever have 
a greater or less value than that with which it is compared and 
exchanged. Professor Fawcett has stated this truth correctly; 
" When the general value of a commodity declines, less of every 
commodity can be obtained for it in exchange ; but if this be so, 
the value of all these commodities must rise, when compared with 
the particular commodity in the value of which it has been sup- 
posed a general decline has taken place. These considerations 
demonstrate the erroneous nature of a statement not unfrequently 
made, that there is a general rise or fall in the value of all com- 
modities It is quite impossible that there should be a gene- 
ral rise of values, for if there is a rise in the value of one com- 
modity, there must be a fall in the value of all the commodities 
with which this one is compared."* The works of Adam Smith 
and RiCARDO are badly infected with error in consequence of their 
failure to see this truth. Both sought after an invariable standard 
of value, which every living political economist admits cannot be 
found. 

Before quitting this branch of our subject we may define the 
meaning of price. It is the value of a commodity expressed in 
money. Thus Bascom says that "the price of anything is its 
power to command gold, silver, or that which constitutes the cur- 

* Manual of Polit. Econ. p. 270. 



56 ON THE MEANING AND CAUSES OF VALUE. 

rency of the country. Value may be expressed in any commodity 
whatever : price is expressed in one commodity only." * 

We are now ready to consider the causes of value. What are 
the causes leading men to agree to the values of articles bought 
and sold? 

It has been the custom among political economists to treat 
of the causes of value instead of those of price, yet as ex- 
changes in all civilized countries are generally expressed in 
money, our investigation will be simplified if we consider the 
causes of price rather than those of value. In so doing, this as- 
sumption is involved, which must be kept in view, that when the 
price of a commodity varies, the variation is always supposed to 
be produced by something which affects the value of the commodity, 
and not the value of money. Let us explain our meaning by an 
illustration. Suppose it is observed that the price of wheat rises ; 
this rise in the price of wheat may be due to two very distinct 
causes. In the one case wheat may become scarcer, and therefore 
dearer; in the other case, wheat, in common with every other 
commodity, may rise in price, in consequence of new discoveries 
of the precious' metals, such as those made in Australia and 
California during the last few years. In the following investiga- 
tion, the assumption is made that variations in price are not 
caused by an alteration in the value of money; 

What, then, are the causes of price ? They are four, namely, 
difficulty of attainment, exchangeability, personal effort, and willing- 
ness of deprivation. 

By difficulty of attainment is meant the labor or other difficulty 
inhering in, or connected with, a commodity which a person who 
is not the owner desires, and which he had rather buy than per- 

* Polzt. Econ., p. 222. 



ON THE MEANING AND CAUSES OF VALUE. 57 

form the labor of attaining directly himself. Hence, if an object 
having capacity to satisfy the desire of another cannot be had with- 
out difficulty, it is valuable, provided the person desiring it be of 
sufficient ability to pay for it. But if a commodity has no capac- 
ity to satisfy the desire of another, or if, having a capacity, the 
commodity can be had without difficulty, it has no value. A man 
living in the country may suddenly find the waters of his well dried 
up. To him, therefore, water has become exchangeable. Yet it 
may have no value because he can get it of his neighbor by a very 
slight personal effort. He goes to the city to live. Here he wants 
Avater as before, but he finds that he cannot get it, by simply 
going to his neighbor's well. He cannot get it by direct personal 
effort without going a considerable distance beyond the city. 
Rather than go so far, he is willing to pay some one for it in 
order to have it. Consequently the water paid for has value, be- 
cause it could not be had without an effort, — without difficulty of 
attainment, — which the person had rather pay for than make 
directly hirhself 

AVhenever an exchange actually takes place, price expresses or 
measures this difficulty. If I pay seventy-five dollars for a watch, 
the money expresses or represents the difficulty of attaining it, — in 
other words, the labor expended in making it ; I had rather pay 
this money for the labor of another than make the watch myself 
Whenever an exchange does not take place, difficulty of attainment 
is only another expression for the labor enhancing the exchange- 
abihty of an object. Yet labor does not always render an object 
more exchangeable. A man may build a house in the wilderness 
at vast expense, nevertheless it may have no exchangeability, be- 
cause no one has such tastes and desires as the builder. 

It is most important to remember when difficulty of attainment 



58 ON THE MEANING AND CAUSES OF VALUE, 

is used as an equivalent or measure of price, and when it is used 
as expressing simply the labor bestowed upon an object. 

The second cause determining price is exchangeability. This we 
have previously defined as the capacity of an object to satisfy the 
desire of one who is not the owner. Now it is evident that when- 
ever the desires of men change, the capacity of things to satisfy 
their desires changes also. Moreover, it is exceedingly difficult, 
indeed it is impossible, to find out all the causes which create and 
influence the desires of men. The causes are varied, often occult, 
unknown. 

To A, a fine picture is worth $5,000; to B, not half that sum. 
Various reasons may be given for the different estimates of the 
picture. A perhaps, has a finer taste for art, or appreciation of 
the particular picture. He may think it will become more valu- 
able with age, or that the genius of the artist will become more 
fully recognized in the future. The causes operating upon desires 
are too obscure often to be determined. 

The paradoxical proposition has found defenders, that not only 
does price depend upon exchangeability, but that exchangeability 
depends upon price. This paradox does not, we think, exist; nor 
would it ever have been declared true, if the distinction between 
difficulty of attainment as an equivalent of price and as another 
expression for labor had been kept in view. Suppose a man is 
trying to find a house, with the intention of purchasing. After 
looking at several houses, he finds such an one as he wants. It 
is an expensive place; the grounds are laid out with great care 
and skill. It is the taste and labor displayed about the place 
that render it so exchangeable. Satisfied that it is the place he 
wants, he inquires the price. He has never thought of the price 
the owner would ask till now. Suppose the owner is unwilling to 



ON THE MEANING AND CAUSES OF VALUE, 59 

sell the house except at an enormous price which the other is un- 
willing to pay. The ])urchaser has the means to buy, but he is 
unwilling to pay so much. Perhaps he thinks the owner is trying 
to drive a sharp bargain with him. He turns away disappointed ; 
afterwards he learns that the owner is willing to sell at a greatly 
reduced price. He purchases the house. Yet during all the time 
between the first examination of the house and the purchase of it, 
its exchangeability was unchanged. Hence it is clear that the 
exchangeability of objects is not affected by their price; but 
whether exc/ia/igcs actually take place or not, these depend upon 
the price of the things exchanged. Take peaches, for example. 
When they are first brought to market, many say: "We will not 
buy now, we will wait till the price is lower." They want them 
in the beginning just as much as afterwards, perhaps more. Their 
exchangeability is the same from the first to the last of the peach 
season ; though not many exchanges are made till prices fall to a 
certain point. 

There are many rocks unseen when the waters are high, that 
appear when the waters recede. Yet the rocks are there, whether 
the waters are high or low. So with our desires. They are as 
real when prices are so high that no exchanges are made, as 
when prices are low and exchanges frequent. The only difference 
is, that when the prices of things rise above a certain point, the 
desires of men for them are unknown to the world ; when prices 
fall below a certain point, the desires of men are found out 
through their efforts to gratify them. 

There is one class of commodities, the exchangeability of which 
depends primarily upon their value. Remembering that utility is 
the capacity of an object to satisfy the desire of its possessor, we 
remark that some commodities have utility solely on account of 



6o ON THE MEANING AND CAUSES OF VALUE. 

their value. Thus a diamond is useful at the present time because 
it has capacity to satisfy desire. Let diamonds become plentiful, 
however, and not only would their value vanish, but their utility 
also. Nobody would want them. Now it may be properly said 
that those articles which are useful simply because they are valua- 
ble are only exchangeable for a like reason. But all other com- 
modities are exchangeable because of the labor or other difficulty 
connected with them. This is the cause which renders them ex- 
changeable. Yet the value of the diamond, so long as it has any, 
is measured or estimated by difficulty of attainment like other 
commodities.* 

A third cause determining price is personal effort. This is one 
of the causes fixing the extremes of price. Thus suppose a pur- 
chaser is seeking for a chair. He goes into a store, and finding 
one that he likes, inquires the price. Being told that it is ten 
dollars, he remarks that he will not give so much, and that if the 
dealer will not sell it for nine dollars, he will make one himself. 
Personal effort, therefore, is the cause that fixes the highest price 
for the chair. As it is a cause determining the highest price of 
things, so likewise does it determine the lowest. 

What do we mean by the highest and lowest price of a com- 
modity ? The first term is easily enough understood. The high- 
est price is the most which a purchaser will pay for a thing. 
What is meant by the lowest price ? The least that the dealer ac- 
tually will sell for, and at which he must sell, else the purchaser 
will obtain the thing desired by a direct personal effort. 

* This was the assertion really made by Bastiat in his Harmonies of Political Economy, and 
which Professor Cairnes has attacked. Fort. Rev., vol. xiv, p. 424. But the error into which 
we think the latter has fallen is in considering the difficulty of attainment paid for as the diffi- 
culty expended by the finder of the diamond. This is only a partial consideration of the whole 
fact. The price paid for the diamond measures the difficulty of attainment which the purchaser 
had rather pay for than undertake himself That is to say, the difficulty actually paid for is 
the one which the purchaser himself would probably have to overcome in order to find the 
diamond. 



ON THE MEANING AND CAUSES OF VALUE. 6 1 

Willingness of deprivation is the fourth and last cause deter- 
mining price. When vulcanized rubber goods were first made, 
they constituted a monoply as long as the patent existed, so that 
no one could make them except the patentee and those whom he 
permitted. A, the purchaser, desires a pair of boots, but B, the 
monopolist, will not sell them for less than ten dollars. A's un- 
willingness to be without the boots leads him to give this price. 
But he would give no more. Either he would get them by per- 
sonal effort (supposing that he could make them), or he would 
deprive himself of them rather than buy at a higher price. Thus 
we see that A's personal efifort, or willingness of deprivation, de- 
termined the highest price which he would pay for the boots. The 
same causes may determine their lowest price. The monoply has 
expired. A wishes another pair. Now he tells B that he will not 
give him only four dollars a pair. Why not ? Why is he willing 
to deprive himself of them if he cannot purchase at that price ? 
Because he believes he can buy elsewhere for the price offered. 
Willingness of deprivation, therefore, is a cause determining price, 
for no exchange can take place unless the price comes within the 
limits which men will pay. 

Moreover, willingness of deprivation cannot be resolved into 
any other cause of price. It is easily distinguished from exchange- 
ability, for that quality may, as we have seen, inhere in an object 
after willingness of deprivation has prevented a transfer of the 
ownership thereof 

Let us now inquire when the highest and lowest prices are paid 
tor things ; and, also, what is the reasonable price towards which 
all things are tending. 

First, whenever a commodity constitutes a monoply, then the 
highest price is paid for it. 



62 ON THE MEANING AND CAUSES OF VALUE. 

Secondly, whenever the supply of a commodity is unlimited, — 
that is, when it can be produced without increase of cost, — then 
the lowest price is paid for it. 

Thirdly, the reasonable price of a commodity is the cost of pro- 
duction, by which is meant the money paid for labor, material, 
etc., together with a reasonable sum for profits. 

Let us test the correctness of these principles by applying them 
to actual exchanges. 

Formerly, the screw part of the metal screw had a fiat end, so 
that a hole had to be made in the wood previous to the insertion 
of the screw. In 1846, a screw was invented having a point like 
a gimlet, which could be inserted into pine and other soft woods, 
such as are most commonly used, without first making a hole. 
The great advantage of usmg this screw will be readily seen. It 
always fitted the wood snugly, and held the pieces secured by it 
firmly together, while it could be put in more quickly than the 
old-fashioned screw. Thus it had a greater utility, and likewise a 
greater exchangeability, than the other. Being a new and useful 
invention, the patentee had the exclusive right of making it for the 
succeeding eighteen years. By agreement with the patentee, a 
company was organized that began the manufacture and sale of 
these screws. The company fixed a price at which they were 
sold, which was not altered very much during the whole time the 
company had the exclusive right of making them. This company 
alone could make them, and they were not obliged to manufacture 
any at all ; or, if they were, they could dictate the purchase price. 
Hence, it was in their power to sell at the very highest price 
people would pay rather than go without. They could fix a price 
so high that no one would buy them; they could lower it so 
that only a few would buy, or they could diminish it so low 



ON THE MEANING AND CAUSES OF VALUE. 63 

that many would purchase. The price, however, the company 
sought to fix was the highest price at which the screw would be 
generally sold in the place of the old-fashioned one. It was a com- 
paratively easy matter to determine this, for they could tell by 
observation and inquiry whether these screws were used m the 
place of the old ones, and whether they were used where they 
should be, instead of something else in their place. And as the 
screws came into general use soon after their manufacture began, 
it was evident that the company had set as low a price as was 
necessary, in order to make extensive sales. 

It is not always easy for the monopolist, in the beginning, to 
ascertain what is the highest price he can set upon his monopoly 
in order to reap the largest profit therefrom. For, be it remem- 
bered, the monopolist does not always seek to set a price at 
which the largest quantity can be sold, even though he should 
get a reasonable or great profit from his sales ; but rather the 
highest price at which the largest quantity will be sold, and the 
greatest aggregate profits realized during the time he has the exclu 
sive right of controlling his monopoly. Thus suppose the monopoly 
consists of the right to make and sell rubber goods. At first rubber 
boots are sold at eight dollars a pair. We will suppose that half of 
this sum is profit. Thinking that the sales will be largely increased 
by a reduction of price, the boots are afterwards sold for six dol- 
lars a pair. More purchasers are found at the latter price than at 
the former, but as the profits have been reduced one-half it is now 
necessary to sell twice as many goods as before, else the aggregate 
profits are diminished by the reduction of price. If, therefore, it 
is found upon trial that a diminution of price does not bring as 
large aggregate profits as the former price, then a higher price is 
set upon the goods. And as the monopolist can control the price 



64 ON THE MEANING AND CAUSES OF VALUE. 

of his monopoly, whatever it may consist of, so can he coldly 
squeeze out of men by trial the highest price they will pay for 
his things rather that not have them, without fear of losing his 
trade, or of being undersold, for there is no one to compete with 
him. This trial of the market in order to ascertain the best price 
at which goods can be sold, has been aptly termed by Adam 
Smith '^the higgling and bargaining of the market." 

We might have given a simpler illustration, showing how the 
monopolist can control the highest price of his monopoly. We 
will suppose him to be the owner of a fine picture by a cele- 
brated master. It is the only one of the kind the master has 
ever produced. The owner offers it for sale at the highest price 
which he thinks any one is willing to pay. Suppose the price to 
be ten thousand dollars. A dozen men offer five, three offer seven, 
two offer eight, and one offers nine, thousand dollars for the pic- 
ture. This is the highest price offered, and at which the owner 
must sell, if he sells at all. Having a monopoly, therefore, he is so 
situated that he can draw out the desires of men without losing 
his picture, and, consequently, can get the very highest price any 
one is willing to give. 

Another form of monopoly may be mentioned, namely, distance 
from another market. Let us illustrate the character of this 
monopoly. On the line of the Chicago and St. Louis railroad 
lives a miller, who, at one time, sold a portion of his flour to 
his neighbors for eight dollars a barrel, and sent the rest to St. 
Louis, which, after payment of ten cents per barrel for freight, he 
sold for seven dollars. Hence, he received one dollar and ten 
cents more upon every barrel sold at home than upon each one 
sent to St. Louis. Yet it was cheaper for his neighbors to pay 
him eight dollars than go to St. Louis and buy the flour for six 
dollars and ninety cents a barrel. 



ON THE MEANING AND CAUSES OF VALUE. 65 

The extent of this monopoly may be easily enough ascertained. 
It is the difference between the merchant's time and expense of 
travehng to the market where the things are bought, and the time 
and expense of his customer. Thus, suppose that the expense of 
doing a retail business in New York and Chicago is the same, 
and that the merchants at both places intend to sell so as to 
clear the same net profits. The New York merchant buys a 
certain kind of silk of an importer and sells the same for three 
dollars a yard. Now, supposing that the Chicago merchant was 
amply repaid for the cost of transportation, traveling, etc., if he 
sold the same silk at three dollars and twenty-five cents per 
yard, yet if he actually sells it for three dollars and fifty cents a 
yard, the additional twenty -five cents in price is a monopoly 
which he enjoys in consequence of being so far away from the 
New York market. 

The same principle may also be illustrated in the case of sev- 
eral kinds of labor. A noted artist is a monopolist. He may 
charge the highest price, and people will readily pay. So with a 
distinguished lawyer and physician. A Webster or Mott has the 
field to himself; he can ma'ke his own prices. So with some 
other men. But in proportion to the number of men exercising 
the same calling, and having the same skill, does the monopoly 
decline. Whenever labor constitutes a monopoly, its price is con- 
trolled by the laborer. 

From what we have said, we think the reason clearly appears 
why every dealer seeks, so far as he can, to make the thing he 
sells a monopoly. For if he succeeds, he can get the highest 
price for it; while if he does not succeed, he can get only the 
lowest price, that is, a price which, if raised at all, the purchaser 
will not pay; for either he will acquire the thing by personal 
6 



66 ON THE MEANING AND CAUSES OF VALUE. 

effort or obtain it from some other dealer. Let us restate this 
idea in other language. The dealer, if he be a monopolist, can 
get the difference between the lowest and highest price which a 
purchaser will pay for a thing; if he be not a monopolist, the 
purchaser saves the difference for himself Is it strange, therefore, 
that every dealer should try to become a monopolist, seeing that 
he has this advantage, that he can get the highest price which 
the purchaser will pay for his monopoly ? So we find all sorts of 
combinations among men in order to make monopolies out of 
their trades, products, and professions. This is especially notice- 
able of late among railways. They combine for various reasons ; a 
prominent one being to control the price for carrying freight and 
passengers. And just here, in illustration of what we are saying, 
may be mentioned a monopoly enjoyed by Commodore Vander- 
BiLT and his friends when the Erie Canal is closed. This is the 
only avenue for transportation between various places, except the 
New York Central Railroad. When, therefore, communication 
by way of the canal is stopped on account of ice, the own- 
ers of the railway have a monopoly, which they enjoy to the 
fullest extent. Mr. Mill gives a very interesting illustration of 
the way in which a monopoly was created. The Dutch East 
India Company at one time owned the Spice Islands, and could 
control the quantity of produce raised. In consequence of being 
able to limit the quantity, they " obtained a monopoly price for 
the produce " sold. " But to do so they were obliged, in good 
seasons, to destroy a portion of the crops. Had they persisted in 
selling all that they produced, they must have forced a market by 
reducing the price, so low, perhaps, that they would have re- 
ceived for the larger quantity a less total return than for the 



ON THE MEANING AND CAUSES OF VALUE. 67 

smaller; at least they showed that such was their opinion by de- 
stroying their surplus."* 

We cannot stop longer to point out other forms of monopoly ; 
some of them will come to light in connection with other parts 
of our subject. Besides, whether an article constitutes a monopoly 
or not, or whether men are seeking to make a monopoly of a 
particular thing or not, can generally be determined by slight ob- 
servation. But this is true, that whenever a monopoly exists, 
whatever it may consist of, the monopolist, to the extent of his 
monopoly, can get the highest price for his commodities. 

Let us take up the second principle, and test its correctness by 
applying it to other exchanges. Take the case of common cotton 
goods. They can be manufactured to an almost indefinite amount 
without increase of cost. But there is no monopoHst to squeeze 
out the highest price which the purchaser will pay rather than go 
without them. In the case of the screws, the monopolist could get 
the highest price for them because he could control the quantity. 
He had one end of the string, and that the most important one, 
which no man could take away. Now, the situation is reversed. 
The purchaser can buy at the lowest price. If the dealer charged 
any more, the purchaser would go away with the expectation of 
purchasing of some one else. 

And now the light breaks forth to clear .up the darkness cre- 
ated by the monopolist. As his selfishness leads him to accumu- 
late the largest aggregate profits from his monopoly, so do these 
high profits, by exciting the selfishness of other men, draw them 
into the production of the same things whenever it is possible. 
Thus, it often happens that if a business is exceedingly profitable, 
others will press into it until production becomes so great that the 

* Princ. of Polit. Ecoh., vol. i, p. 552. 



68 ON THE MEANING AND CAUSES OF VALUE. 

cost of producing will not be realized. One illustration will suffice. 
So long as the patent for making vulcanized rubber goods was in 
force, the owners of it realized gr^at profits therefrom. Upon the 
death of the patent, so many rushed into the same business that 
the succeeding gains of the monopolist melted quickly away. So 
is it ever with monopolies. The selfishness of men which inspires 
them to create monopolies is counteracted by the selfishness of 
others, bringing about, sooner or later, their destruction. Hence, 
while one party in the industrial world is trying to build up 
monopolies, another party is equally zealous in tearing them down. 
Having shown when the highest and the lowest price are paid 
for commodities, we shall take note of the reasonable price towards 
which all commodities are tending. This is the ultimate price 
which will be paid for all things. For no man will continue to 
produce permanently at a loss; indeed, he could not do so if he 
wished ; as he would inevitably become a bankrupt. So Mr. Mill 
says: "Capitalists will not go on permanently producing at a loss. 
They not even go on producing at a profit less than they can 
live upon. Persons whose capital is already embarked, and 
cannot be easily extricated, will persevere for a considerable time 
without profit, and have been known to persevere even at a loss, 
in hopes of better times. But they will not do so indefinitely, 
or when there is nothing to indicate that times are likely to im- 
prove. No new capital will be invested in an employment, un- 
less there be an expectation not only of some profit, but of a 
profit as great (regard being had to the degree of eligibility of the 
employment in other respects) as can be hoped for in any other oc- 
cupation at that time and place. When such profit is evidently not 
to be had, if people do not actually withdraw their capital, they 
c,t least abstain from replacing it when consumed. The cost of 



ON THE MEANING AND CAUSES OF VALUE. 69 

production, together with the ordinary profit, may therefore be 
called the necessary price, or value, of all things made by labor 
and capital. Nobody willingly produces in the prospect of loss. 
AVhoever does so, does it under a miscalculation, which he cor- 
rects as fast as he is able."* 

Let us give one other illustration for the purpose of bringing 
into a single view the existence and operation of the foregoing 
principles. Several years ago checked woolen clothing was exten- 
sively worn, it then being fashionable. In the beginning, the 
quantity that could be obtained was quite limited, and as its 
exchangeability suddenly increased, it constituted a monopoly to a 
limited extent. The profit to the manufacturer being large, others 
began to make the same goods as soon as they could, so that the 
profits on them rapidly fell away to the cost of production. After 
a time fashion made a new decree that checks should no longer 
be worn. Immediately the exchangeability of the goods declined. 
Those who followed the decrees of fashion, if daring to trample so 
far upon her laws as to wear out what checked clothing they had, 

• 

bought no more. True, some were unmindful of her dictates 
and were willing to wear checks still; to others these goods had 
always had a certain degree of exchangeability, and when the 
merchant was willing to sell at a price corresponding with their 
exchangeability to these purchasers, they were ready to buy. In 
the beginning, the manufacturer was a qualified monopolist, that 
is, he controlled the supply for a time, and so fixed the price; 
afterwards the exchangeability of the goods rapidly declined, so 
that the purchaser fixed the price; in the end, the quantity on 
hand having diminished, the final price was determined by the cost 
of production. 

* Princ. of Polit, Econ., vol. i, p. 555. 



70 ON THE MEANING AND CAUSES OF VALUE. 

It is evident, therefore, that a reasonable price, which is the cost 
of production, will be the ultimate price of all things. This price 
will also equalize the division of gains so that no one will get more 
or less than he ought to have. It is beyond our space to show 
that the number of commodities bought and sold at a reasonable 
price are constantly increasing, yet the .evidence of this fact is 
conclusive. 

The difference between the highest and the lowest price of a 
commodity is often modified by various causes that we may call 
extrinsic. Thus a man may pay more for a thing, because of his 
friendship to the seller, or sympathy for his condition. People 
will pay more for things at fairs and festivals in order to aid the 
objects which such associations represent. So the members of a 
community may trade at a particular place, even though they pay 
a somewhat higher price for their goods, on account of the known 
character of the dealer for honesty, politeness, etc. Again, the de- 
sires of a purchaser may often be veiled, so that he does not 
actually pay as high a price as he would, if, his mind being 
like a piece of glass, the dealer could see what his real desires were. 
The same is also true of the dealer. These are seeming, not real 
exceptions to the principles set forth. 

Having stated when the highest and the lowest price are paid, and 
also what will be the ultimate price of things, it may be neces- 
sary to say something further concerning the fluctuations of price. 
If, for instance, the price of wheat is one dollar per bushel to- 
day, and one dollar and a quarter to morrow, what has produced 
the change? Many would say it has been produced either be- 
cause the quantity to be had has diminished or the quantity de- 
sired has increased. This is not always true. Suppose that three 
men are each desirous of purchasing a particular horse, and that 



ON THE MEANING AND CAUSES OF VALUE. 7 1 

each one is willing to give one hundred dollars for it, and no 
more. No greater price can be obtained for the horse because 
there are three customers than if there were only one.* The same 
is true in respect to many of the transactions of life. People will 
give a certain sum for a particular thing, and no more ; no matter 
whether the quantity be more or less. The reason of this in many 
cases is, that if things cannot be purchased at a given price, 
others are purchased as substitutes therefor. Consequently, if 
the quantity of a commodity becomes much reduced, the dealer 
may be obliged to sell at the old price, or no one will buy. 
Remembering that personal effort and willingness of deprivation 
always fix the extremes of price, fluctuations in price are the 
consequences of a change in the exchangeability of things. So 
long as this is unchanged, whether the article itself becomes plen- 
tiful or scarce, its price remains the same. It is true when the 
quantity of a commodity diminishes, its exchangeability often in- 
creases, and vice versa. Suppose, for illustration, that the wheat 
crop is only half as great this year as last, so that all cannot 
have their wants supplied if they remain the same as before. I 
say to myself: " The wheat crop is short this year, but I mean to 
have all that I want, whether others get all they want or not." 
Others say the same thing. In such a case it becomes more ex- 
changeable, so that all are willing to pay a higher price. Take 
another example. Not long since the price of laths in the New 
York market had advanced a little. What was the reason of this 
advance ? It was suddenly found that the quantity on hand was 
quite limited, and the dealers believed that all the laths in the 

* Mr. Thornton has succeeded in showing that the law of supply and demand, at least as 
generally stated, is very defective ; that if it were true, prices should often rise when they do 
not, and vice versa. (Thornton on Labor, chap. i). Though succeeding in this, his attempts 
to replace it by the law of competition, we think Mr. Mill has shown to be a failure. See re- 
view of Thornton's book by J. S. Mill, Fort. Rev., vol. xi, pp. 505-518. 



72 ON THE MEANING AND CAUSES OF VALUE. 

market, and more, would be needed at once to finish the build- 
ings in process of construction. The dealers took advantage of 
this state of things to increase the price. They became in fact 
qualified monopolists, that is, they sought to control the price to 
a certain extent. When the condition of the market was found 
out by the builders, they rushed to the dealers to get their wants 
supplied in order to complete their work. The exchangeability of 
the laths suddenly increased, — the builders were willing to pay 
more for them, — and so the dealers could get the additional price 
they had fixed. Suppose the builders had met together and 
agreed not to pay the advance, but to send elsewhere for their 
supplies, would the advance have continued? Certainly not; it 
would have sunk down till the purchases were sufficient in num- 
ber and quantity to satisfy the dealers. So it will be found in 
every case. Personal effort and willingness of deprivation fix the 
extremes of price, while the variations between them are depend- 
ent upon exchangeability, which in turn is affected by many causes, 
the chief of which is difficulty of attainment. 



VI. 



A MEASURE OF VALUE, 



It is impossible, as we have seen, to find an invariable measure 
of value. 

But a comparison of values may be made, showing what ought 
to be regarded as a real advance or decline in the value of a 
commodity. Suppose that the value of ten commodities have re- 
mained unchanged for twenty years, and after that time, one of 
them, wheat for example, cannot be exchanged for more than half 
the quantity of the other things as before. The value of wheat as 
measured by them, has declined in value, which decline may be 
regarded as a real diminution. 

Although an invariable standard of value is impossible, neither 
is it needed for so many purposes as is generally supposed. A 
measure of value is not required to inventory one's possessions. 
Prof. Fawcet is wrong in saying that "without some such meas- 
ure the amount either of a nation's or an individual's wealth could 
only be stated by enumerating a long catalogue of commodities. 
Instead of saying that a farmer is worth jT^ 9,000 we should be 
able to form no other estimate of his wealth, except by making an 
inventory of his possessions. The number of cows, horses, pigs, 



74 A MEASURE OF VALUE. 

sheep, the quantity of corn, etc., he possessed, would all have to 
be separately enumerated."* Not so, for if there were no recog- 
nized standard of value, he could estimate the number of bushels 
of wheat or pounds of iron, to which all his property is equivalent. 
Instead of affirming that his property was worth ^^ 9,000, he might 
say it was worth 100,000 bushels of wheat or ten thousand tons 
of iron, or something else. 

A measure of value is not required in making specific ex- 
changes. For example, two horse-jockeys meet who wish to trade 
horses. Do they need any measure of value in order to swap ani- 
mals? Listen to their conversation. A is willing to exchange 
equally, but B says no ; he wants something more besides A's 
horse. "If," says the latter, "your horse is worth $100, mine is 
worth $200." In other words, B regards his horse as worth 
twice as much as A's. It is of no consequence how much A 
values his horse, or by what standard he values him, B regards his 
horse as worth twice as much. It will be readily seen that if 
gold or any other measure of value had never been thought of, the 
valuation of the respective horses could be as easily ascertained. 

A measure of value is needed to compare or r.egister the values 
of all articles of merchandise for purposes of general exchange. 
For, if one person was comparing the value of all things by wheat, 
and another by gold, and another by silver, and a fourth by cop- 
per, and so on, it would be quite impossible to have any general 
quotation of prices. As these are necessary for the transaction of 
business, as well as for estimating the cost of living, a standard of 
value is necessary. 

Another need of a measure of value is to prevent undue gain 
or loss by persons in making contracts. For, if the measure be a 

* Man. of Polit. Econ., p. 301, 3d ed. 



A MEASURE OV VALUE. 75 

varying one and increases in value, the creditor will get too 
much; if the measure decreases in value, he will get too little. 

In our country the unit of measure for expressing value is the 
dollar, which measure was established by act of Congress, April 
2, 1792. This measure of value, Avhich is a decimal one — con- 
sisting of a dollar and its fractional parts — so superior in con- 
venience to every other measure in use, was the invention of 
Jefferson. 

Although the unit of value-measure is the dollar, yet there are 
four different instruments expressing that unit. 

The act of 1792 provided for the coinage of a silver dollar, 
of the value of a Spanish milled or pillar dollar, then current. 
The silver dollar was first coined in 1794, weighing 416 grains, of 
which 371^ grains were pure silver, the fineness being 892.4 
thousandths. The act of January 18, 1837, reduced the standard 
weight to 412^ grains, but increased the fineness to 900 thous- 
andths, the quantity of pure silver remaining 371^ grains as be- 
fore. The coinage of the silver dollar has been discontinued, 
except as a " trade dollar " for circulation in China, Japan, and 
other oriental countries.* 

The act of March 3, 1849, authorized the first coinage of gold 
dollars. They were issued the same year. They weigh twenty- 
five and eight-tenths grains, are nine-tenths fine, and contain 
23,22 grains of pure gold. Under this act they have been coined 
ever since. 

In 1862, Congress authorized the issue of a paper dollar, com- 
monly known as the greenback. This has ■ become the universal 
measure of value in this country. As this paper dollar is worth 
less than a gold one, people will buy and sell, by the inferior 

* Act of Congress, 1873. 



76 A MEASURE OF VALUE. 

measure. This is always the case. In proof of the fact it is only 
necessary to state that the prices of most commodities are largely 
increased because of the adoption of this paper measure. When 
gold or its equivalent was the only measure of value, in 1859, 
a barrel of flour was sold for five dollars. When greenbacks were 
invented, in 1862, the same quality of flour sold in 1864 for ten 
dollars a barrel. Why this difference of price? Because in the 
latter case the flour is measured by greenbacks ; in the former by 
gold. Some things are measured by the gold dollar now, the 
same as before the creation of legal-tender notes, especially impor- 
tations, which are paid for in gold; the prices of almost every- 
thing else, however, are measured solely by paper dollars, because 
sellers expect to receive them in exchange for their commodities. 

The last form of dollar is the bank note, which has the same 
value and characteristics as the legal-tender note, and the two are 
employed indifferently as a unit of measure. 

Thus, the dollar — the unit of measure — embraces gold, silver, 
legal-tender- and bank-notes. If we inquire the price of anything, 
the answer usually is, so many dollars; or, if less than a dollar, 
the fractional part thereof. In store and shop, in railway car and 
manufactory, the price of everything is measured by dollars. 

When a commodity is exchanged for a dollar, whatever may be 
the instrument expected in exchange, we do not have in view the 
receiving merely of some ideal thing, but rather of so much gold, 
or silver, or its equivalent. Some deny this. Says Mr. Col- 
well:* ''When a barrel of flour is said to be worth five dollars, 
the party fixing that price does not mean the quantity of gold in 
a half-eagle, or of silver in five dollars. . .So, if in England 
an article is said to be worth fifty-five shillings, neither party 

* Ways and Means of Payment, p. 79. 



A MEASURE OF VALUE. 77 

forms any idea of the quantity of gold equivalent to that amount, 
although payment cannot be made in silver beyond forty shillings. 
So, during the Revolutionary war, when for many years there was 
only a paper circulation, prices were expressed in the various cur- 
rencies of the different colonies, and very few indeed could have 
been guided by the quantity of gold or silver equivalent to any 
price expressed in their pounds, shillings, and pence. 

" It is evident, therefore, that money of account is the medium in 
which prices are quoted and expressed in all countries. It is ca- 
pable of measuring, comparing, and stating values to the utmost 
extent of the requirements of trade." 

It is true when dollars are received and paid, we are not always 
thinking of the quantity of gold or silver they contain, but rather, 
what may be had for them. This is why it has been said that a 
counterfeit or base dollar performs equally well the offices of a 
good one, so long as no one knows that it is bad. Still, in re- 
ceiving metallic dollars, we do not forget about their weight and 
purity. The reason why we do not always weigh them is that, 
from long experience, we find they are generally as heavy and as 
pure as the law requires. Let their debasement begin, either by 
the admixture of foreign metal, or by diminution in their legal 
quantity of gold or silver, and not a metallic dollar would be re- 
ceived without first being weighed. The same is true of paper 
dollars. As long as their future redemption is certain, they are 
readily received without thinking about the quantity of gold and 
silver that may be had for them; let their redemption become 
uncertain, and people will be disinclined to receive them, either in 
exchange for commodities, or in payment of debts. Their value 
diminishes, perhaps ceases. 

It is true that an ideal money has been used by some people. 



78 A MEASURE OF VALUE. 

The famous illustration of Montesquieu is always brought to the 
front by those maintaining the theory of an actual or possible 
ideal measure of value. The author of the Spirit of Laws * ob- 
served that the blacks on the coast of Africa have a sign of 
value without money, purely ideal, A certain article is worth 
three macutes, another six, another ten macutes. This is the 
same as if they said simply three, six, ten. Dr. Lieber once 
stated in an address before the Historical Society of New York, 
that " in Hamburg millions are exchanged in the name of the mark 
banco, but no such coin exists, nor is there any native coin of 
that commercial city — though, of course, foreign coins are in use." 
Earth, t in his Travels and Discoveries in North and Cejitral Africa, 
writes of a people who have " not at present any standard of 
money for buying and selling; for the ancient standard of the 
country, namely, the pound of copper has long since fallen into 
disuse, though the name ' rotl,' still remains. The ' gabaga,' or 
cotton strips which then became usual, have lately begun to be 
supplanted by the 'cowries' or 'kungona'. . . . Eight cowries 
or kungona are reckoned equal to one gabaga, and four gabaga, 
or two and thirty kungona, to one rotl." Here an ideal measure 
of value has survived the use of the real measure. 

It is not true, however, that the dollar — our money of account 
— is ideal money, as Mr. Colwell maintains, for we are thinking 
of its weight and purity whenever we receive it, or, if we receive 
a paper dollar,^ of its ultimate redemption in the precious metals. 
We admit that we are slowly approaching towards the use of ideal 
money in consequence of divorcing in thought the quantity of gold 
contained in the dollar from the dollar as a thing of pure imagin- 

* Vol. 2, p. sg, new Am. ed. 
tVol. 2, p. 55. 



A MEASURE OF VALUE. 79 

ation. It is possible to have an ideal money.* The foregoing 
extract from Barth proves this. That the time is not yet, nor 
soon will be, when our money will become purely ideal, is not 
worth time and space to refute. 

Only one measure of value ought to exist in a State. For, 
the having of a second one is a source of confusion and loss. This 
has been clearly maintained by nearly all economic writers. Said 
Sir William Petty, as early as the seventeenth century, in allud- 
ing to the use of gold and silver as standards : " The relative 
value of gold and silver is modified according as human industry 
extracts more of one than of the other from the bowels of the 
earth. Consequently only one at a time should be used as money." 
And likewise I.ocKEt has written that, "two metals, as gold and 
silver, cannot be the measure of commerce both together in any 
country : because the measure of commerce must be perpetually 
the same, invariable, and keeping the same proportion of value in 
all its parts. . . One may as well make a measure, for example a 
yard, whose parts lengthen and shrink, as a measure of trade, of 
materials that have not always a settled, invariable, value to one 
another." Moran and Patterson | are the only writers of late 
holding opposite views. They contend that if two or more things 
are used as standards of value, it is within the power of the 
government to declare what each is worth, so that no difficulty 
will arise from their use. This may be admitted, but the very in- 
stances Moran § has given of neglect and incompetence on the 

* Money of account . . might exist, although there was no such thing as any substance, 
which could become an adequate and proportional equivalent for every commodity. Sir 
James Stewart's Polit. Econ., vol i, p. 526,' 4th ed. 

"Civilized nations generally make use of ideal money only, because they have converted 
their real money into ideal." — Montequieu Spirit of Laws, vol. 2, p. 56. 

\ Locke's Works, vol. 5, p. 151, 2d ed., 1823. \ Econ. 0/ Capital, pp. 56-9. 

^ Money, chap. IV, 



8o A MEASURE OF VALUE. 

part of the government, prove quite conclusively that it should not 
be intrusted with such a delicate duty. So long as one is sufficient 
for our purposes there is no necessity for having more. 

The experience of France has led her to oppose a double 
standard. The French monetary commission, of 1869-70, consist- 
ing of twenty-three members, voted, by a large majority, in favor 
of a single gold standard, some of the members going still further, 
and insisting that it was desirable to ascertain the views of other 
countries, as to the measures required to carry out such an ob- 
ject.* Likewise the Belgian Monetary Commission, of November, 
1873, reported in favor of adopting a similar standard, declaring 
that the rise of prices in their country had been greatly aggravated 
in intensity by the existence of a double standard. So the world 
is gravitating towards a single standard, and ultiriiately will have 
but one. 

*■ See Corresp. in Land. Ecori., Nov. 15, 1873. 



YII. 



MONEY AND ITS USES. 



Great Mammon ! Greatest god below the sky. — Spenser. 

The term money, taken in its strict etymological sense, means 
something standing between two extremes and relating them to 
each other. Money is exchanged for other things, but never for 
itself. Small boys, indeed, swap cents, but men use money as a 
medium to get other things than those parted with. Men have 
the same wants now as before the invention of money — they want 
bread, cloth, furniture, etc. — and money is used only as an easier 
means of satisfying these wants. If we could imagine a state of 
society in which commodities were exchanged without the use of 
money, we should readily learn the great advantage of having it. 
In such a state the various products of the earth were exchanged 
directly for each other. This system of exchange is called barter.* 

* The following instance of exchange by means of barter is taken from a work upon Fiji and 
ike Fijiatis by Thomas Williams and James Calvert. They exchange pottery for masi, mats 
and yams. On one island, the men fish, and the women make pots for barter with people on 
the main. Their mode of exchange is very irregular; the islanders send to inform those on the 
main-land that they will meet them, on such a day, at the trading place, — a square near the 
coast paved for that purpdse. The people of the continent bring yams, taro, bread, etc., to ex- 
change for fish. . . The island tribes of the Great Fiji take yagona to the co.-»st, receiving in 
exchange mats, mace, and fine salt. P. 72. 



^2 MONEY AND ITS USES. 

Of a time when this state of things existed Homer sings : 

" From Lemnos isle a numerous fleet had come 
Freighted with wine . - . . 

, . All the other Greeks 

Hastened to purchase, some with brass, and some 
With gleaming iron ; some with hides, 
Cattle or slaves."* 

Money is a measure of value and a medium of exchange. 
Having already shown for what purposes a measure of value is 
required, it now remains to point out the offices fulfilled by money 
as a medium of exchange. 

First. — It is a labor-saving instrument. A, a hatter, desires a coat. 
He goes to B, a tailor, and making known his wants, offers to ex- 
change a hat for the garment desired. But B says he does not 
want a hat. So A goes to some other tailor who makes the same 
reply; he remarks, however, that he does need a pair of shoes, and 
if A could supply him he would take them in exchange for a coat. 
A must now find a shoe-dealer, who will accept of a hat in ex- 
change for a pair of shoes. After spending a great deal of time, 
A finally succeeds in exchanging a hat for a pair of shoes and then 
goes to the tailor and exchanges them for a coat. See how much 
labor might have been saved in this exchange by the use of 
money. A, instead of going to B, to exchange a hat for a coat, 
would have sold his hat for money to any one who wanted it, 
and with the money thus obtained he could have procured a 
coat. For A would have been willing to receive money in ex- 
change for his merchandise inasmuch as he could exchange this 
for anything he desired. The hat could purchase only one par- 
ticular thing, namely, shoes. Thus it had only a limited purchas- 
ing power, while money has a general purchasing power. 

* Lord Derby's trans. 



MONEY AND ITS USES. 83 

Thus Prof. Perry* correctly says, 'in pointing out the difference 
between money and other commodities : " They have the power 
of buying some sorts of things from some persons, it has the 
power, derived from the usages of society, to buy all sorts of 
things from all persons." Because money has this general pur- 
chasing power it saves a great deal of time in making exchanges. 
" At first view," says CHEVALiER,t " it might seem that the use of 
money complicated transactions, inasmuch as it necessitates two 
exchanges where otherwise there would be but one ; but, in truth, 
its use is of enormous advantage, and we should take an im- 
mense step backward in civilization, if we were to return to bar- 
ter. It has been wisely said that there is no machine which 
economises labor like money, and its adoption has been likened 
to the discovery of letters." 

The utility of money as a labor-saving instrument may be strik- 
ingly illustrated from the experience of Earth. | He tells us that 
in one of the villages through which he passed, the practice of the 
farmer was to bring his com to the Monday market, but he would 
on no account receive shells in payment, and would rarely accept 
of a dollar; the person, therefore, who wished to buy com, if he 
had only dollars, was first obliged to exchange them for shells ; 
with these he must buy a " kulgu," or shirt, and with this he 
might succeed, after a good deal of bantering, in buying the 
farmer's corn. So great was the difficulty of getting things, in 
consequence of having no general medium of exchange, that often 
his servants would return from their purchases in a state of the ut- 
most exhaustion. 

Secondly. — It prevents the deterioration and loss of commodi- 

* Elements of Polit. Econ., p. 208. 

t On the Probable Fall in tht Value of Gold, p. a8. 

\ Travels, vol. 2, p. 51." 



84 MONEY AND ITS USES. 

ties. C is a baker. He must dispose of his bread quickly 
after it is made or it will spoil. He cannot find only here and 
there a person who will give him any thing useful for it in ex- 
change. Thus exchanges take place slowly and with difficulty, 
and while they are going on the bread becomes old and unfit for 
use. Long before disposing of his entire stock, a portion of it has 
been injured or destroyed. If money were in use, he could 
readily sell his bread for money, and with that obtain whatever 
he desired. By transmuting his perishable products into money, 
he may keep its power of purchase locked up in this form as long 
as he pleases. 

Thirdly. — Money reduces the cost of a commodity. In a State 
having no money with which to make exchanges, more time is ex- 
pended, perhaps, in exchanging things than was spent in pro- 
ducing them. Thus, the hatter previously mentioned might have 
consumed more time in exchanging a hat for the coat he wanted 
than was employed in making the hat. Consequently, the hatter 
is really deprived of the benefit of his labor, or the value of his 
product must be increased. 

Fourthly. — Men do not always wish to exchange for equal 
amounts. A farmer who brings a fatted ox to market finds per- 
sons enough wanting a few pounds of beef, but none wanting the 
entire animal. He cannot divide the ox and give a part of it 
for a few pounds of coffee or tea; perhaps he does not want the 
value of one quarter of the animal in groceries or other things. 
By means of money all difficulties can be easily overcome. The 
farmer can first exchange the ox for money, and with that he can 
get whatever he desires. 

Fifthly. — Money secures the employment of labor by providing 
for its reward. Without money how could a cotton factory, for 



MONEY AND ITS USES. 85 

example, be run with its hundreds of hands ? The owner could 
pay them only in cloth ; and what could be done with that ? 
They certainly have not time to go far to exchange it for other 
products, and if they had, they would be unable to make the 
desired exchanges, for no entire community requires more than a 
limited amount of cloth. And if the operatives, in despair of get- 
ting their bread, should think of sending their cloth away, who 
wants, it? where shall it be sent? A man having nothing except 
labor or skill to offer, might be unable to secure employment from 
those who wanted him and were wilHng to pay him most liberally, 
because they are not able to give him anything satisfactory in 
return; hence, he must labor for those who are willing to give, in 
ever so small quantity, the articles needed for his support. " The 
physician must take his pay in iron, or bread, or butcher's meat ; 
and if any of his patients produced what he did not want, he 
must either 'attend them gratuitously, or they must die without 
assistance. Besides this, there are many products incapable of 
division. If a hundred men are engaged in building a ship or a 
house, how would they take their pay in kind, without taking the 
ship to pieces, and thus rendering their work wholly useless?"* 
Thus, without money the division of labor would hardly exist. 
Rather than lose the time to make exchanges or run the risk of 
losing the results of his labor, by injury or decay, or be subjected 
to the other difficulties mentioned, every man, so far as possible, 
would supply his own needs by direct effort.t 

Besides, no man could perfect himself in any one art, trade, 
or profession. In the effort to supply his wants by making him- 

* Wayland, El. 0/ Polit. Econ., p. 190. No author has illustrated the uses of money more 
clearly than President Wavland. 

t Barth says that he was repeatedly prevented from buying what he absolutely needed, 
com, rice, etc., because he did not have, and could not get what the people wanted in 
exchange. Travels, vol. i, p. 568; vol. 3, p. 203. 



86 MONEY AND ITS USES. 

self whatever he desired, he could not attain to that perfection 
which is possible whenever man is permitted to practice a single 
art or trade, or make a single part of a complicated mechanism. 
Manufacturers could not thrive at all who sought to make those 
products requiring a minute subdivision of labor. But if the 
laborer be paid in an article that is universally desired, he can 
get whatever he likes; hence, it will make no difference in what 
business he is engaged as long as he can have money in exchange 
for his labor. 

Such are some of the most obvious advantages of the use of 
a medium of exchange. To these, others might be added, but 
enough has been said to make it clear that money is of the 
greatest use as a medium for exchanging other commodities. 

Money, then, combines these two qualities — it is a measure of 
value, and a medium of exchange. This definition is by no 
means exact, for the reason, not only that a perfect value-measure 
cannot be found,, but also, that everything is a measure of value 
and a medium of exchange which is given or received for some- 
thing else. If jack-knives are used as a means for getting other 
things, they are instruments of exchange and measures of value. 
Everything parted with is a measure of value for ' the thing re- 
ceived in each particular transaction. All that can be said of 
money is, that it is something used in a particular country or lo- 
cality more generally than anything else for the purposes above 
stated. The mistake of writers upon this question is in trying to 
give a precise definition, which cannot be framed, unless it be ex- 
ceedingly general.* 

William Latham has declared that coins, all notes, whether 
issued by the State or by banks which are endowed with the fac- 

* See Banker's Mag., vol. 26, p. 545; article, "What is Money?" 



MONEY AND ITS USES. 87 

ulty of closing contracts, paying debts and acquitting debtors, are 
money.* The defect in this definition is that not all of these 
instruments measure value, although all are mediums of exchange. 
A definition in the North British Review,\ that money is " only 
another word for the machinery which accomplishes the exchange 
of commodities," is defective for the same reason. Prof. Price \ 
has said that " money is not an end but a means . . and thus 
we arrive at last, at the true view that money is a tool required 
for certain specific purposes." 

Is it not a little singular that the uses of money, which are 
simply these two — a measure of value and a medium of exchange 
— should be the subject of so much confusion? For this, two 
reasons may be given. 

First. — Many people believe that Government can create value 
and money. Government is as powerless to create value as 
Robinson Crusoe was, when living on his lone island in the 
Pacific. Two persons are required to create value in every case. 
What people will take from the Government in exchange for what 
is given, lies as much within the power of the people to deter- 
mine as of the Government. It has no more power of ordain- 
ing what its members shall receive from one another in satis- 
faction of debts than the birds of the air. Government may in- 
deed, call a bit of gold " one dollar," but it is not the work or 
power of the Government which gives value to the gold. That is 
the product of labor which the Government never performed. 
Melt the gold sO that every mark of the Government superscrip- 
tion is obliterated, yet its value is unchanged. The Government, 
by coining it, merely announces its weight and fineness. 

Does the value of a piece of paper depend upon the inscription 

* Fort. Rev., vol. 4, p. 214. t Vol. 35, p. 176. \ PrincipUs 0/ Currency, pp. 166, 167. 



oo MONEY AND ITS USES. 

of the Government thereon ? A greenback has value. Is it 
valuable simply because the Government says so ? Suppose the 
Government declared greenbacks to be valuable, and yet peo- 
ple declined to take them, would they retain their value ? Of 
course not. They are valuable "because the people believe that 
the Government will fulfill the promises of which these are the 
evidence. 

Secondly. — Money was not designed to stimulate, but to facilitate 
exchanges. It was designed to save time and labor in making ex- 
changes, but not to add to the number of them. Says John 
Stuart Mill : " It is a machine for doing quickly and com- 
modiously what would be done, though less quickly and com- 
modiously, without it." 

This economic principle is very imperfectly understood else no 
cry would be heard for more paper money. The people, or a 
large portion of them, have seized the idea, that somehow the ra- 
pidity of exchanges, and the prosperity of business, depend upon 
the quantity of money in circulation; the greater the quantity, the 
more prosperous is business. This is a grievous error and arises 
from a total misconception of the uses of money. It sprang out 
of the fact that during the war, when more paper currency "was 
issued, business vastly increased, and every one rejoiced over his 
prosperity. But the prosperity enjoyed at that time was due, not 
to an increase of currency, but to a greater demand for all sorts 
of products. The Government became an enormous consumer, and 
of course its demands were great. It was the National demand 
superadded to that existing before, which gave such an impetus to 
business. The currency afloat, or more strictly, partly afloat, did not 
affect the demand. If none had been issued the demand would 
have been as great. A coincidence was mistaken for a cause. 



MONEY AND ITS USES. 



89 



This principle, that currency was invented as a labor-saving 
instrument, to render exchanges more convenient, ought to be 
sounded in the ears of all who are seeking for an expansion of 
the present irredeemable currency. It requires no argument to 
prove that what people are really trying to get are the things 
which minister to the sustenance and happiness of life and body, 
and that money is merely a medium, a go-between, for getting 
them. Now, suppose there be an increase of money, how can 
these things be more easily acquired if their prices are increased ? 
No one, for a moment, will contend that an increase of money 
does not tend to increase prices, and that any more can be pur- 
chased, in the aggregate, with the Avhole sum, than with the sum 
existing before the increase was added. 

It is not the proper function of money to stimulate exchanges. 
This is a perversion of its use. It was intended to facilitate them 
and nothing more. Were this idea kept in view we should hear 
no more about an increase of the currency. 

The Hebrews used silver as money, for it is written that 
"Abraham weighed to Ephron, the silver which he had named, 
in the audience of the sons of Heth, four hundred shekels of 
silver, current money with the merchant."* Among pastoral nations, 
cattle were frequently used, and still are, by some of the tribes of 
Africa. Homer tells us that the armor of Diomede cost nine 
oxen. Soon after the period of the Homeric poems, copper skew- 
ers were used as money throughout Greece, which were super- 
seded by the silver coinage of Pheidon.I 

* Gen., 23: 16. 

t See Rawlinson's Herodotus. On the invention of coining and the earliest specimens of 
coined money, Book i, appendix, note B. Also same work, Book i, 94 and note 3; Book 4, 
166, and notes; Book 7, 2S and 29, and notes. I'he Lydians. "so far as we have any knowl- 
edge, . . were the first nation to introduce the use of gold and silver coin." Id., vol. i, 
p. 180. 



90 MONEY AND ITS USES. 

Once, the Anglo-Saxons regarded slaves as money ; likewise, the 
people of Newfoundland codfish in the last century. The Indians 
had their wampum ; ^Virginia, at one time, its tobacco ; and 
Massachusetts, wheat. Adam Smith says, that in his day a 
village in Scotland used nails. Among the Carthagenians an 
unknown substance enclosed in stamped leather was frequently 
used.* Likewise, bark stamped with the image of the sovereign 
in China. Among the Spartans, iron passed as money; among 
the Romans copper, simple or compounded with other metals. 
Throughout the islands of the Eastern Ocean, and many parts of 
Africa and India, shells are still used. The Ethiopians are 
said to have used carved pebbles. In Thibet, and in some parts 
of China, small blocks of compressed tea serve as money. In some 
of the American colonies powder and shot were once employed; 
likewise, logwood in Campeachy, sugar in the West Indies and 
salt in Abyssinia. In some parts of Africa strips of cotton 
cloth are used. Earth speaks of the use of the " rothl," an ideal 
money having no real existence, although pieces of metal of that 
name once circulated. He mentions the use of beads as money in 
many places.! An ideal money, called macutes, is mentioned, by 
Montesquieu, as once in use among some tribes in Northern 
Africa. Sooner or later gold and silver have come to be re- 
garded as money among all nations, which have been able to ob- 
tain them, either by industry, commerce, or conquest.^ 

* Political economists and others have generally affirmed that the Carthagenians had leather 
money, but this is a mistake. See Heeren's Historical Researches. African Nations, p. 68. 

t For money in use in different parts of Africa see Bakth's Central Africa, vol. i, p. 
568; vol. 2, pp. 55, 151; vol. 3, pp. 190, 230. Also Burton's Lake Regiojis, pp. 233, 271. 

\ MoRAN mentions many things which have been used as money, p. 7 ; also Say, Polit. Econ., 
chap. 21, sees, i and 2. Patterson has well said: "We need not seek a definition in 
the intrinsic qualities of the substances out of which money is made, for there is not a single 
intrinsic quality which is common to them all. The generic quality which constitutes money 
is manifestly something extrinsic to those substances — some quality superimposed upon, or 
attributed to them, or at least to the shape which they assume as currency." — Ecoti. o 
Capital, p. 13. 



MONEY AND ITS USES. 9 1 

The various things used as money differ greatly in value. 
Among highly civilized nations gold is the most valuable instru- 
ment. The reason is it can be exchanged among a greater num- 
ber of persons than any other thing. It is held in high esteem 
by the people of nearly half the earth. Yet gold is not valuable 
everywhere. " If English merchants send out sovereigns to China, 
the Chinese will not receive these coins as money — nor any other 
kind of gold coins. Gold is not money in the Celestial Empire; 
one-third of the human race (nearly one-half of the civilized popu- 
lation of the globe) refuse to accept the yellow metal as currency. 
Even in India, where gold coins have been in use from the ear- 
liest times, the value of gold is greatly diminished."* 

Why have gold and silver such a pre-eminence over other 
things as money ? First, because of their portability. " One pound 
weight of gold will ordinarily command, in exchange, fifteen 
thousand pounds of wheat, thirty thousand pounds of Indian corn, 
five tons of rice, or a ton and a-half of cotton.t The same 
quality renders silver valuable as money, though less so, in many 
countries, because a larger quantity than gold has only the same 
value. 

These metals are very ■valuable as money, because they are so 
malleable. They can be wrought into any shape, will receive and 
retain any impression, may be divided into the minutest quantities 
and again united, with the smallest possible loss. Hence, they are 
admirably adapted for coinage. In consequence of the small sub- 
divisions into which they may be coined, they can be exchanged 
as of equal value for a great number of products. 

* Patterson, id., p. 13. ' 

t Am ASA Walker, Science 0/ Wealth, p. 127, from which work the reasons why gold and 
silver are fitted to serve as money are chiefly drawn. See also Say's FolU. Econ., p. 170, 4th 
Am. ed. 



92 MONEY AND ITS USES. 

They are of uniform quality. Found in California, Australia, 
or Russia, gold is everywhere the same. The iron of different 
countries varies greatly. The copper of Siberia is better than that 
of Germany, while the copper of Sweden is better than that of 
Siberia, and the copper of Japan surpasses that of Sweden. It 
is not so with gold and silver. 

They may be readily alloyed and refined. By alloy they are 
made harder, and so better adapted to use as money. Likewise, 
can they be easily restored to their original purity without loss. 

They are unaffected by atmospheric influences. They do not 
rust or decay like iron, so that the gold and silver in the age of 
the Ptolemies may be in existence to-day, either as plate or 
money. 

They are almost inconsumable by use. Nearly all other com- 
modities are rapidly destroyed by using them. Articles of food 
and clothing, for example, disappear in a comparatively short 
period. Even iron, in the ways in which it is generally used — 
railroads, agriculture, the mechanic arts, etc. — lasts only a few 
years. But the duration of gold and silver is vastly longer. In- 
vestigations made at the United States Mint show that the wear 
of gold was only i to 2,400; that is, a gold dollar would wear 
out only by 2,400 years' service. 

A transcendent reason why gold and silver are so valuable as 
money is their uniformity of value. The necessity of having com- 
modities which will always possess value, and which will fluctuate 
as little as possible, is well understood. Burton has illustrated 
this necessity in his Lake Regions of Central Africa* At one ot 
the villages which he visited, the value of money was liable to 
perpetual change, often, he says, causing severe loss to the 

- * p. 271 ; see Earth's Central Africa, vol. 2, p. 55, 



MONEY AND ITS USES. 93 

merchants who, after providing themselves with a large quantity 
of it (consisting of beads) find that it suddenly becomes unfashion- 
able and consequently useless. I may promise to pay a thousand 
dollars in gold ten years hence, without running any risk that it 
will be more difficult to get than now. There is such abundance 
in the world, I would probably be able to get the money without 
paying any more for it than at the present time ; whereas, if I 
promised to pay wheat, for instance, it might be very difficult to 
be had. The crop might be short, and if I was able to get it at 
all, I should be obliged to pay a heavy price. Or if, on the 
other hand, it was very plentiful, the person to whom I have 
agreed to deliver it would not get anything like an equivalent to 
that given to me. The need, therefore, of having something of as 
nearly unchangeable value as possible, is very great. 

It is impossible to discover or invent anything, the value of 
which will be changeless. The value of gold and silver is 
variable, though the least so of any substances known. Conse- 
quently, as long as their value remains so uniform, they are ex- 
ceedingly useful as money. One reason of this is, because they 
are so universally desired. Hence, if they have a greater value 
at one place than another, they instantly begin to flow towards 
that place where their value is smallest. In this way their value is 
kept steady. 

To complete this side of our subject, we remark that gold and 
silver were valuable long before they came into use as money. 
That is a function superimposed upon these metals. This use in- 
creases their value, but it is not the sole or principal cause of 
their value ; or the cause of imparting value to them in the first 
place. The Wampumpeag currency of the American Indians was 
regarded as beautiful by them, and so it passed as currency. 



94 MONEY AND ITS USES. 

The same is true of gold and silver. They were prized before 
they came into use as money, else they never would have been 
used for that purpose. Being desirable apart from their use as 
money, they are found admirably fitted to serve this additional 
function, and so are used for this purpose.* 

The inquiry may be pressed: Why did gold have value in the 
beginning ? What gives value to anything ? Exchangeability, which 
we have seen to be one of the causes of value, springs out of 
the manifold desires of man. Gold and silver gratified desire, 
the same as diamonds, pearls, or other things. When gold and 
diamonds were first placed in the canon of wealth, it is easy 
enough to see why they were such desirable forms of wealth to 
possess. A noble, we will suppose, has a large estate which he 
wishes to convert into some other form of wealth that may be 
easily transported. He intends to gO a long distance. He can- 
not, of course, take his land with him, and it would be very 
difficult to take animals, or furniture, or any bulky merchandise. 
Besides, he might be robbed of these things on the way. But he 
converts all his land and cumbrous property into gold and dia- 
monds which are a very small parcel, and that he can easily carry. 
There is less fear of robbers, for few, if any, know that he has 
these things in his possession. Again, his houses and lands are not 
so desirable, because they may be seized by his sovereign. A quar- 

* " Gradually, in the course of time, and by the exigencies of society, they came to be ap- 
propriated by general consent to the uses of money, till at last that consent became universal 
in the civilized world. This appreciation was ulterior and consequent to the ascertainment of 
the many useful and admirable qualities of these metals for other purposes, without which 
there is no probability that they would have been employed as money. . . Gold and 

silver are not valuable simply because they are money. This was not the original ground 
of their being held in such high esteem ; but they have been adopted and have obtained uni- 
versal consent to be used as money or a common medium of exchange because of their value for 
other uses, and because they are always in demand for such a vast variety of appropriations 
other than money." — Colton's Public Economy. See also on the Origin of Money; Patter- 
son's Science of Finance, p. ii ; Mill's Polit. Econ., vol. 2, p. 19. 



MONEY AND ITS USES. 95 

rel may spring up between them, and his domains may be invaded 
and laid waste. But if nearly all his property consists of gold and 
precious stones, he can conceal them from his destroyer by 
burying them in the earth, or by fleeing with them to a distant 
country. 

Moreover, wealth was originally a sign of social rank, and is 
still a sign of power. When the lord lived near his broad acres, 
men knew what his rank was, from the fact that he was the 
owner of large possessions. Suppose he concludes to go into a 
country where he is not known. If without wealth of any sort, 
he is regarded as belonging to the common herd of mankind. 
But he comes wearing gold and diamonds and other marks of 
great wealth. At once he is taken to be a person of elevated 
social position, for one without such a position could not be the 
owner of so much wealth. In this respect, we have not yet 
passed much beyond the same rude state of civilization. Many 
people still wear gold and diamonds, because being wealth, they 
confer power, even if they do not rank. People look up to rhen 
of wealth in consequence of this- hence, many seek for those 
forms of wealth which may be easily displayed. They like the 
attention it draws. But let diamonds become as plentiful as the 
sands in which they are found, and who would wear them ? If 
they were once prized because of their beauty, they are not so 
now, for let abundant mines be discovered and people would shake 
them off like the dust of the street. It is principally the idea to 
be considered wealthy, that leads men and women to wear so 
much wealth. Let a person who, whether wealthy or not, cares 
to make no display of it, and what does such an one think of 
diamonds ? He does not wear them or care anything about them. 
This desire to display wealth is a scar of a barbarous civilization, 



96 MONEY AND ITS USES. 

which will disappear when wealth ceases to be a source of power, 
and intelligence and moral goodness are enthroned in its place.* 
It by no means follows that gold and diamonds will always con- 
stitute wealth because they are so regarded to-day. Yet, so long 
as they are, and so long as they can be obtained only by the 
expenditure of great labor, of course, a small quantity will have 
great value, and will remain very desirable forms of wealth. 

The question has been discussed of late, how much money or 
currency does any country require to effect its exchanges. The 
answers generally given to this question display dense ignorance. 
They show how very imperfectly the functions of money are un- 
derstood. It is looked upon by many as a mighty question which 
few, if any, are capable of answering. This is because such per- 
sons do not comprehend what the functions of money are. If they 
did, they would see that the question can be answered easily 
enough. 

Whenever the business of a country has become adjusted to the 
currency employed in making its exchanges, whatever the amount 
may be, no increase thereof is ever required. This is one of the 
clearest principles of economic science. It makes no difference 
whether the volume of currency be great or small, prices will ac- 
commodate themselves to it; and if the amount thereafter be in- 
creased, other things remaining the same, the only effect of such 
increase will be to raise the price of commodities. So if a part 
of the currency be withdrawn, the effect is a depression of prices. 

* Coffin, in his Our New Way Round the World, thus speaks of the dress and ornaments 
of a Hindoo woman : " No Western lady can appear in such gorgeous costume, as the Hindoo 
woman before us, wearing a robe of crimson silk, reaching to the knees, trimmed with yel- 
low bands across the shoulder, a yellow skirt edged around the bottom with cloth of sil- 
ver, beneath which is an underskirt of purple silk. There is silver enough in the broad 
rings and bands clasping her ankles for a set of tablespoons, to say nothing of the display 
on her arms, round her neck, dangling from her ears and nose, and gleaming on her fin- 
gers, or of what she has lavished upon the garmentless child toddling by her side." P. 119. 



MONEY AND ITS USES. 97 

It is of little consequence what the volume of currency may be* 
with which a nation first begins to exchange its productions. 

Now, as long as a nation sticks to the currency it has once 
adopted, and to which all values have been adjusted, there is no 
diflftculty in effecting exchanges, provided that such a currency 
commands the perfect confidence of all. There will be no vio- 
lent disturbance in exchanging commodities while the same cur- 
rency is used on account of it. If exchanges are disturbed, they 
will arise from other causes than the currency. Like the sun, it 
will pursue its appointed course without interruption or change. 

When a currency having the confidence of all is supplanted by 
an inferior currency, then exchanges are unsettled on account of 
it. Let it be remembered that no sound currency disturbs ex- 
changes. If the currency employed by a country produces this 
effect, it is certain that such a currency is unsound. In the 
United States we have driven out a sound, specie currency by 
means of an inferior, paper currency. While the former was in 
use, we were never troubled with the inquiry: How much of it 
does the country need? The currency was self-regulating; it was 
free from legislative regulation. But when it was supplanted by 
the present currency, exchanges were violently unsettled, and will 
remain so as long as it is below par. The more local a currency, 
the more violent are its fluctuations in value, while the converse 
of the proposition is equally true. Gold and silver have a wide 
circulation, and their value in all places is the same ; but our 
paper currency has no circulation outside of our own country, 
hence its value is very unstable. 

Keeping these facts in mind, it is easy enough to answer the 
question : How much of this paper currency does the country 
need? The less of it the better while it continues below par with 
8 



gS MONEY AND ITS USES. 

■gold. If it be an inferior currency, as it certainly is compared 
with gold and silver, we should not make it poorer by watering 
it, but rather contract the quantity and so improve its quality. 
The country needs no more of it; there is altogether too much 
now. 

Besides, by increasing its quantity, its purchasing power is dimin- 
ished, so that the aggregate purchasing power of the larger amount 
is no greater than that of the smaller sum. When an individual 
gives his notes for $100,000 and has only half that sum to pay 
them with, and his creditors know it, every one, except he be an 
inflationist, beheves the debtor will neither improve nor sustain his 
credit by issuing more notes. The same is as true of the Govern- 
ment as of individuals. Its legal-tender notes are below par. The 
people prefer gold to them. By issuing more their value will 
diminish. There is no escape from this effect. The Government 
by no sort of ingenuity can increase the aggregate purchasing 
power of the currency as long as it is at a discount. By issuing 
more, its purchasing power is diminished, and the country has no 
larger amount in fact with which to make exchanges. 

We conclude^first, there is too much currency now, and the 
excess will be felt so long as it is worth less than gold, which is 
promised in redemption of it; secondly, while its inferiority to 
gold continues, the question whether the country wants more of it 
or not is without any significance, because the country by no kind 
of legerdemain can actually get more if it be wanted. Of course 
a larger amount may be issued, but its value is entirely absorbed 
by the currency existing before. 

When the currency of a country is sound, its value depends 
upon three things : first, the amount of business done there ; 
secondly, the extent of its credit; thirdly, the rapidity with which 



MONEY AND ITS USES. 99 

its money circulates. If business is light, or money circulates 
rapidly, or credit be extensive, less money is needed than if the 
opposite conditions prevail, and so its value is less. 

Money circulates more rapidly through the agency of banks 
than in any other way. By keeping money in these institutions 
they are able to loan it again and again ; one person deposits a 
sum, it is discounted to another, he pays it into another bank, 
which, in turn, discounts it to some one else. Any report of the 
Comptroller shows this. The amount of the National circulation, 
according to his report for 1873, on the 12th of September, was 
$339,081,799, while the loans amounted to $940,233,304. Of 
course there was the legal-tender circulation of $356,000,000 be- 
sides ; on the other hand, a large amount of currency was in the 
possession of the people. From these facts it is clear that cur- 
rency circulates more actively through the agency of banks than 
through the action of individuals. 

'l"he use of credit in its various forms, bank checks, bills of ex- 
change, etc., supply the place of money. We shall discuss here- 
after the matter of the extension of credits in this country and 
how they operate to lessen the need for money. England has 
not so much currency as France, though doing a vaster business, 
yet her exchanges are easily made by means of the various in- 
struments of credit. In France, money is absorbed, hoarded; in 
England, it is deposited in banks and kept in^ circulation. When 
the German indemnity was paid by France and new loans con- 
tracted, it was a world's wonder that such an immense throng 
should gather in Paris to subscribe for the loan. They came from 
all parts of France. It was the country, farming population. 
They had laid by money, and, instead of depositing it in banks, 
it had been kept in their houses. The loan being regarded safe, 



lOO MOlSfEY AND ITS USES. 

the money was drawn forth. The reflection is not creditable to 
that country that such a vast throng should be without confidence 
in the Bank of France, or its branches; or rather, that France 
should have no money institution commanding the confidence of 
the people except the Government itself 

This fact, that credit serves the same purpose as money in 
liquidating debts, proves the necessity of maintaining it whenever 
possible, in order to avoid panics and the necessity of providing 
additional currency when they occur. For when these calamities 
arise and confidence or credit is gone, more currency will be re- 
quired than at other times. Thus in the panic of 1873, every- 
body wanted money ; no one dared to trust. Many at once came 
to the conclusion that the country needed more currency ; that 
business had increased so enormously the present amount was 
inadequate to make exchanges. No one said this a week before 
the panic. Why not? Because, in fact, there was enough. So 
long as confidence was generally diffused there was no need of 
additional currency. The panic destroyed that, and then the de- 
mand for more money was universal. Upon the restoration of 
confidence, no more money was needed than before. This is the 
true explanation of the state of things which prevailed. When 
confidence was strong there was money enough; when confidence 
disappeared, more money was required to supply the place which 
confidence had filled. 



VIII. 



DECLINE IN THE VALUE OF GOLD AND SILVER. 



Nearly all political economists agree that the value of gold and 
silver is depreciating. This depreciation arises chiefly from three 
causes : the larger supply ; its lessening demand for ornamental use ; 
and the substitution of other things for money. 

In respect to the present supply, much labor has been expended 
to ascertain the production of gold and silver since the earliest 
times, yet no results thus far obtained command a very wide as- 
sent. In 1 83 1, Mr. Jacob published an elaborate Historical In- 
quiry into the Production and Consumption of the Precious Metals^ 
covering the field of investigation from the earliest ages to the 
time in which he wrote. This work, though abounding in wide 
research, is, after all, only an estimate, and that even very rude 
and imperfect in respect to the production of the precious metals 
during the earlier ages. Indeed, the difficulties of finding out the 
production and consumption of the precious metals, says M'CuL- 
LOCH, are " at least as great as their importance. They are not, 
in truth, of a kind to afford any certain conclusions, and we must 
be contented with those that seem to present, on the whole, the 
greatest amount of probability." For the production of gold and 
silver in America, from the discovery of the country to 1803, 



I02 DECLINE IN THE VALUE 

great reliance has been given to Baroi^ Humboldt's estimate in 
his Political Essay npon the Kiitgdoin of Neiv Spain, though Mr, 
Danson,* who carefully studied Humboldt's figures, together 
with the data pertaining to the subject, has found reason to 
amend them. Chevalier has carefully gone over the ground in 
his work upon the Probable Fall in the Value of Gold, though 
Blake's Report ipon the Precious Metals, made to the United States 
Government in 1867, is the latest, and probably the best, exposi- 
tion on the subject. t 

The aggregate production of gold and silver to 1868, according 
to Blake's estimates, is as follows : 

14 to 800 ("Amounts supposed to be on hand) $1,790,000,000 

800 to 1492 345,000,000 

1492 to 1803 5,820,700,000 

1803 to 1848 •. 2,484,000,000 

1848 to 1868 3,571,000,000 

Grand total $ 14,010,700,000 

From this amount the losses are to be deducted, which are as 
difficult to ascertain as the amount produced. Indeed, if possible, 
there is less agreement among writers in respect to the loss of 
gold, than to the amount now remaining. 

As for the future supply it is Well known that gold is derived 
from two sources — placers and veins. That found in the placers 
' was originally contained in the rocks, which has been extracted 
by the grand operations of nature. Streams have rolled' over 
them for unnumbered ages, breaking and grinding them to pieces, 
washing out the gold and carrying it along in their courses till it 
sank to the bottom. Placer-mining, therefore, is nothing but the 

* Journal of Statistical Society of London, vol. 14. 

1 See also Commissioner Wilson's learned investigation in Land Office Report, 1867. His 
researches are very valuable. 



OF GOLD AND SILVER. 103 

digging over the beds of streams and rivers that have become 
dry, and in which gold is supposed to be deposited. 

Once it was thought that, as the soil containing gold which had 
been thus extracted by nature from the rocks, was quite limited 
in extent, when it had been worked over, the future supply of 
gold would be exhausted. Such was the' opinion expressed by the 
late Sir R. I. Murchison in his valuable work upon the Siluria. 
But now it is generally acknowledged that the normal supply of 
gold is to be derived from the rocks, and that the gold found in 
placers is only a small portion of the whole amount. This being 
so, it is clear that the future supply of gold depends upon the 
extent and productiveness of the gold-bearing rocks. 

Murchison strongly maintained that the productive gold-veins 
were confined chiefly to the Silurian rocks, and that the quantity 
which they might yield would, not very long hence, be exhausted. 
The gold-bearing rocks in the Ural Mountains, in Australia, and 
to a considerable extent, in California, belong to the Silurian 
period. If " we cast our eyes to the countries watered by the 
Pactolus of Ovid, to the Phrygia and I'hrace of the Greeks, to 
the Alps and golden Tagus of the Romans, to the Bohemia of 
the Middle Ages, to tracts in Britain which were worked in old 
times, and have either been long abandoned or are now scarcely 
at all productive, or to those chains in America and Australia, 
which, previously unsearched, have in our times proved so rich;"* 
in all these lands gold has been imparted abundantly to only the 
Silurian or the associated eruptive rocks. Yet it has been conclu- 
sively proved since the time when the first edition of Murchison's 
Siluria was published, that gold abounds in rocks of every geo- 
logical age. The explorations of Trask and Whitney in Cal- 

* Murchison's Siluria, p. 475, 3d ed. 



I04 DECLINE IN THE VALUE 

IFORNIA in 1853 and 54; and, subsequently, the discovery of 
secondary fossils in the main belt of gold-bearing slates; together 
with the discoveries in Hungary in 1862, — prove that rocks be- 
longing to the latest geological periods, even as late as the 
Tertiary, contain productive gold-bearing veins.* 

Again, later geological investigation has shown that the quantity 
contained in the rocks, and which is accessible, is more abundant 
than geologists formerly supposed. Murchison maintained that 
the gold-veins parted as they descended into the rocks, till they 
became mere threads that could not be followed or worked to 
advantage. Mr. Selwyn, in his report to the English Govern- 
ment at Australia in 1856 and 57, on the mining resources of 
the colony of Victoria, declared that there was no evidence from 
the mines in that place to sustain Murchison's position that any 
vein rich at the surface dies out or suddenly becomes unprofitable. 
It was true that the upper portion of many veins were once far 
richer than they are now. But the reason was very apparent. The 
gold had been removed by denudation. The very fact that many 
veins, even thus abraded, were still often very rich on their pres- 
ent surface, went far, in his opinion, to prove that the diminution 
of yield in depth, even though admitted to be true on a large 
scale, was still so slow as not to be appreciable within any depth 
to which ordinary mining operations might be carried. Raymond, * 
in his report to the United States Government in 1870,! said that 
most of the gold-veins might be considered as practically inex- 
haustible in depth. Indeed, the statement of Murchison, accord- 
ing to this authority, "is completely overthrown by experience." 
Mr. J. Arthur Phillips speaks the opinion now universally ac- 

* See Whitney's Geology and review of same in Sill, your., vol. 41, pp. 231 and 351, second 
series; Sill. Jour., vol. 45, p. 334, second series. 
t P- 457- 



OF GOLD AND SILVER, 105 

knowledged, that gold ledges are not more liable than ordinary 
metalliferous veins to become impoverished in depth.* 

Gold is found in almost every part of the world. The richest 
mine thus far discovered is the Morro Velho mine in Brazil. 
The gold region in Russia has been constantly expanding by new 
discoveries, till it has reached to the Pacific. Indeed, the dis- 
tribution of gold may be regarded as co-incident with the mount- 
ain chains of the globe. There is no extended region, no great 
political division of the globe, without its gold-field.t Quite re- 
cently, Mr. Pumpelly| has published a work showing that gold 
deposits exist in almost every province of the Chinese Empire. 

The production of silver in modern times was quite limited, till 
the discovery of the Comstock mine in Nevada. Since 1862, 
about $ 80,000,000 have been extracted therefrom. Silver is very 
often found in connection with lead; and as lead veins expand 
largely as they descend from the surface of the earth, Murchison 
has declared that the lead mines will probably yield enormous 
quantities of silver for ages to come. 

Now, if the gold and silver mines are capable of as rich yield 
in the future as in the past, the value of those metals will greatly 

* "Recent observations and experience appear to lead to three important conclusions — first 
that the most productive gold-bearing rocks are by no means exclusively confined to the Silurian 
period; secondly, that aqueous agencies have been, and still are, actively at "work in the forma- 
tion of mineral deposits; and. thirdly, that gold ledges are not more liable than ordinary metal- 
liferous veins to become impoverished in depth." — The Mining and Metallurgy of Gold and 
Silver, by J. Arthur Phillips. R. Brough Smyth, in his Gold-Fields of Victoria, maintains 
a similar view. He says, after examining two hundred veins, that " taking the whole of the in- 
formation and results obtained into consideration, there is much reasonable evidence produced 
in support of the theory that quartz reefs are richer as they increase in depth, and in addition 
to this, that they are wider." 

t Blake's Report, p. 235. 

J Smithsonian Contributions, Oct., 1866. R. Brough Smyth has written, in his work pre- 
viously quoted, that the area of the Australian gold-fields yet unexplored, ot imperfectly so, is 
vastly greater than any other upon the Pacific slope of North America. Of the 20,000,000 
acres of gold-fields in Victoria, not more than 600,000 acres have been explored, while many of 
the oldest mines are yielding, by improved methods, better results than ever before. 



Io6 DECLINE IN THE VALUE 

decline. It cannot be denied that the increased supply of gold 
has sensibly diminished its value several times in the history of 
the world. 

During the period between the commencement of the Persian 
wars and the age of Demosthenes, the precious metals became 
very plentiful in Greece. Their value, consequently, greatly de- 
preciated; as well, also, as in the time of Constantine the Great, 
who caused money to be coined from the precious articles found in 
the heathen temple.* 

When Julius C^sar was emperor of Rome, he brought such 
masses of gold into the money market at Rome, according to 
MoMSEN, t that it fell in value, as compared with silver, about 
twenty-five per cent. 

It is a clearly established fact that the value of gold has de- 
clined in civilized countries since the discovery of the gold mines 
in California and Australia. 

Prof. Jevons| asserts, with the utmost confidence, that there has 
been a rise of prices in England to the extent of eighteen per 
cent., as measured by fifty chief commodities, since the year 1849. 
This rise of prices represents a real diminution in the general pur- 
chasing power of gold to that extent. Yet others, including Prof. 
Cairnes, suppose the decline to be much greater, for the reason 

* See Boeckh's Public Economy of the Atkenians, p. 14, Eng. translation. 

tVol. 4, p. 343. English transl., new ed. Polybius says, that in his time the gold mines 
were so rich about (north of] Aquileia, but especially in the country of the Taurisci Norici, 
that if you dug but two feet below the surface, you found gold, and that the diggings (gene- 
rally) were not deeper than fifteen feet; that in some instances the gold was found pure, in 
lumps, the size of a bean or a lupin, and which lost only one-eighth in smelting ; in others it 
required more smelting, but was very profitable. Italians aiding the barbarians in the working 
for two months, gold became forthwith one-third cheaper over the whole of Italy; and the 
Taurisci discovering this drove the associate Italians away and monopolized it themselves. At 
present all gold mines belong to the Romans, Strabo, book 4, chap. 6, sec. 12, quoted in 
Murchison's Siluria, p. 475. 

\ London Economist, May, 1867. 



OF GyLD AND SILVER. IO7 

that the course of prices previous to 1849, was decidedly down- 
wards, so that the increased supply of gold prevented a greater de- 
cline of them, and also occasioned the rise above stated. In his 
volume of essays, published in 1873, he reaffirms his former 
opinions. He says: "all are agreed that within twenty years a sub- 
stantial advance in general prices has taken place, the only differ- 
ence of opinion is in respect to the causes of this change. 
Amongst economists 1 think it is pretty well agreed that the 
advance is, at least in large measure, due to the effects of the 
gold discoveries. But on the other hand, there is on the part of 
commercial writers, and in general of all who view the question 
from the stand-point of practical business, a strong disposition to 
ignore, or altogether to deny, the influence of this cause in deter- 
mining the results." We are among those who think Prof. Cairnes 
is right, that gold has declined in value, for the evidence in sup- 
port of this conclusion will admit of no other explanation. 

In this country the decline has been very marked since i860. 
Elsewhere, we have compiled a table of prices showing what 
the decline has been in one hundred of the leading American 
products. Other things, in the production of which more labor 
has entered, the decline has been greater. 

The decline in the value of these metals would have been still 
greater had not an immense quantity been drained off to the East. 
If A does not want a thing it is only a slight indication that it has 
no value ; for B and C may want it, and if they do, of course it 
is valuable, although valueless to A, Hence, the precious metals, 
so long as they have a value among a considerable number of 
])eople, though not among all, their value will be preserved. Thus, 
silver, for instance, may become valueless among the most en- 
lightened nations as between themselves, yet so long as such 



Io8 DECLINE IN THE VALUE 

quantities of it are desired by the inhabitants of China and 
India as are at present, its value will not be materially lessened. 
For many years these countries have absorbed vast quantities of 
silver, else its value long ago would have declined. It is for 
this reason, says Patterson, that the prosperity of the world de- 
pends upon the continuance of this drain of bullion to the East."* 

The value of gold and silver will decline from the increas- 
ing use of other things as substitutes for money. The use of 
bank notes, bank checks, bills of exchange, etc., as substitutes for 
gold in making exchanges has become universal. For example, 
the New York Clearing-House Association, representing sixty-one 
banks, received for the year ending September 30, 1872, checks, 
bills of exchange, etc., given by the several banks composing the 
association, $ 33,844,369,568. The use of this vast amount of 
substitutes in place of gold and silver has a direct influence in de- 
preciating the value of these metals. Let an edict go forth that 
no such instruments could be used, or rather, supposing that all 
men were so corrupt that no one dared to use them, and the 
precious metals would enormously increase in value. Hence, it 
may be properly said that gold and silver are declining in value 
because credit or willingness to trust others has increased. It is 
one of the marks of an improving civilization. The substitution 
of the various instruments of credit for gold is attended with 
many evils, arising from unwillingness and inability to comply with 
their requirements; but as the infirmities of human character dis- 
appear, notes and promises of every kind will have general prefer- 
ence over gold and silver as instruments of exchange. 

Gold and silver will decline in value as their use for orna- 
ment declines. Probably it was this use which first gave them 

* See Fawcett's Man. of Polit. Econ., p. 436. 



OF GOLD AND SILVER. IO9 

value. Ornaments are worn for two reasons ; one, to beautify 
the person ; the other, to indicate rank and wealth. So long 
as gold, silver, and diamonds, are regarded as beautiful, they 
will be worn, for not less pains will be taken to adorn the 
person in the coming ages than in the past; but as indications 
of rank and power, they will one day cease to be worn, and 
with every declining use their value is diminished. 

And, lastly, the value of gold and silver, and kindred forms of 
property, which depend largely upon the fact that much value is 
contained in a small space, will decline when other and more cum- 
brous forms of property become secure from seizure and intrusion. 
As society advances, and its laws become more clearly defined, 
more equable in their operation, and more surely and wisely 
executed, the desire to have property compressed into such forms 
that they may be quickly concealed, or transported with less 
danger of loss, will pass away. With this improved state of 
society, its members, instead of converting their wealth into the 
form of gold and diamonds, will build houses and enrich them 
with the works of genius and art — a tendency which is now 
clearly seen in this country and in Europe. Then, wealth will 
be displayed on canvas and in marble, instead of upon the body; 
in things that will minister not to the gratification of one man 
alone, and to him only for an hour, but to many persons and for 
centuries to come. In short, as the laws of property become 
more secure, it is evident that the forms which wealth assumes 
will be greatly changed. Thus gold and silver and the precious 
stones will be of little account, except as they may be useful in 
the arts.* 

* One cause arresting the fall of gold is the increase of population : that is, population has 
kept up the demand. 



1 10 DECLINE IN THE VALUE 

We do not believe that gold and silver would circulate for a 
moment apart from their intrinsic value — that is, apart from their 
value as wealth, apart from their capacity to satisfy, immediately, 
human desires. We know some hold that the chief value of 
money to-day consists in its use as money, and this view we 
think contains much truth. Originally, it was regarded as wealth 
in almost all cases in which it was taken; whereas this eailier use 
has been superseded by another, namely, its capacity to bring us 
other things besides itself that we desire. But when it ceases to 
be wealth, it will cease to circulate at all. A merchant bought a 
certain kind of goods last spring, because, being fashionable then, 
they could be readily sold; but he declines to buy the same kind 
this spring, because, being unfashionable now, they do not com- 
mand a ready sale. So it is with gold and silver. When they 
are no longer regarded as wealth, they will not circulate as money, 
for nobody will take or buy them. Everyone will be afraid to re- 
ceive them lest they cannot be passed off. True, they have not 
changed in appearance or composition any more than the goods 
previously spoken .of, but that makes no difference ; man is om- 
nipotent over his desires, and the fact that he wanted a thing yes- 
terday will not rekindle the desire to-day. Hence, we cannot 
agree with those who hold that gold and silver will continue to 
circulate as money after they cease to be wealth; they may for a 
time, till people find out that their value is gone, just as a bad 
coin will circulate quite as well as a good one till people find out 
that it is bad. But when people do find out that gold is no 
longer wealth, it will not be wanted for any quahty still inhering 
in it. Its value will irresistibly vanish, just as the value of every- 
thing else vanishes which is no longer desired. Gold and silver 
are subject to no peculiar laws by which they will remain buoyant 



OF GOLD AND SILVER. Ill 

in defiance of those laws which sink everything of a kindred nature 
to the bottom. Consequently, when gold and silver and diamonds 
cease to be wealth, and the world finds it out, they will become 
worthless. 

Such are the principal reasons operating to depress the value of 
gold and silver, and which, it is evident, will continue to thus 
operate. Gold will multiply in quantity ; the day of barbaric gold, 
of which Milton disdainfully spoke, will surely pass away, while 
its departure is hastening by the use of substitutes for it, as money, 
as well as in other ways. 

Two consequences flow from the loss of value accruing to gold 
and silver worthy of notice. First, those having it in their pos- 
session, or due them, will sufter loss. The loss of one class, how- 
ever, will be the gain of another, and in this way there will be a 
partial evening up of the accounts between mankind. But Govern- 
ments will be the greatest gainers. In this way, nearly all Na- 
tional indebtedness will be discharged, inasmuch as this is the 
thing which most of them have agreed to pay. Secondly, there 
will be a great saving of human labor in preparing an instrument 
to be thereafter used as money. Patterson has well put the 
question : " Is it not probable that some day . . future genera- 
tions enjoying a more advanced civilization, will look back with 
pity on our barbarism in wasting so much wealth for the mere 
purpose of registering our wealth, and in employing such an infini- 
tude of labor upon what could be accomplished without any." * 

Little do we think of the sufferings and risk of life which poor 
hiimanity has endured to get possession of these shining metals. 
When the Califomian mines were discovered, husbands forsook 
their wives, and brothers their sisters, the emigrant came from the 

* Econ. of Capital, p. lo. 



112 DECLINE IN THE VALUE OF GOLD AND SILVER. 

farthest shore, and all went and delved for the precious gold. 
They endured privation of hunger and thirst, laboring under the 
greatest exposure of body to disease and death — and simply to 
obtain these counters for making exchanges. The story of Cali- 
fornia was repeated in Australia. When that most auriferous 
country was discovered, thousands flocked thither to dig for gold. 
The Buckland river, where the largest nuggets were found, was 
literally a river of death. The rays of the sun, striking the 
rocks upon either side, reflected upon the faces of the miners, 
and caused a worse blindness than that which befel them before 
setting out for the diggings. A little way down the river was the 
cemetery where the miners were laid, so that every fresh miner 
was reminded of his probable fate, as he passed on his way to 
the mines. Nothing daunted, however, they hurried on to meet 
the fate of those who had gone before, and the multitude of 
graves remaining to this day testify of the magic and bewitching 
power of gold. Great as has been the acknowledged power of 
woman, cannot this dull metal claim a greater homage and de- 
votion ? But its sovereignty is to cease; all its long, painful 
history of conquests and sufferings is to pass away. 



IX. 



THE MONEY OF THE FUTURE. 



We have not prepared this chapter with a view to setting forth 
any Utopian or useless scheme, but to answer the assertion that 
gold and silver will continue to be used as money in the indefinite 
future, because there is nothing to put in their place. The 
necessity of money being universally admitted, and nothing hav- 
ing been discovered to supply the use of the precious metals for 
that purpose, the conclusion is drawn that they will be employed 
in that capacity always. Admitting the truth of the first premise, 
we deny the second, and of course the conclusion. 

We have already shown that money performs a two-fold func- 
tion; that it is a measure of value and a medium of exchange. 
In respect to the latter function, a representative of gold and 
silver in the form of paper currency excels the original in con- 
venience. It can be more easily counted, transported, manu- 
factured, is not so easily counterfeited, occupies less space, in 
short, it has every advantage over the precious metals as a 
medium of exchange. 

We have adverted to the necessity of having a measure or 
standard of value, and the desirability of having this standard 

9 



114 THE MONEY OP THE FUTURE. 

comprise the money of a country. It is not necessary, though, 
that the standard be a perfect medium of exchange. If a good 
substitute can be invented for this purpose, the standard of value 
may be a very inconvenient medium of exchange, if it were 
actually used as such, because there would be little need for 
transferring it in bulk. The chief requisite is to select the best 
measure of value, that is, a thing changing least in value, and 
which can be so represented as to form the best medium of 
exchange; in other words, so as to be most easily counted, car- 
ried, preserved from decay, counterfeiting, etc. 

Another important feature in the medium of exchange we must 
not overlook, namely, that it be a representative of actual value; 
that the thing represented can be really had in exchange for the 
riepresentative. In creating a currency or money for a country, it 
does not follow that an amount of money must always be kept 
on hand by an individual, equal to the representative in circula- 
tion, provided the issuer have ample property that may be con- 
verted into money. This is the principle upon which the National 
banks are chartered. Their circulation is secured, not by gold and 
silver in their vaults, but by bonds in the possession of the Govern- 
ment. So long as these are ample security for the payment of 
the circulation, no one will object to receiving the representatives 
of this property. In 1857, when all the banks in New York 
failed, that is, were unable to pay their notes in specie, no one 
objected to receiving their bills, because they were fully secured 
by State bonds held by the Comptroller of the State. The need- 
ful thing about the currency is to provide for its security. Now, 
since the representative of value is to be preferred to the thing 
possessing value, as a medium of exchange, provided the repre- 
sentative be fully secured, since the measure of value is rarely 



THE MONEY OF THE FUTURE. tH^ 

ever wanted so long as it can be obtained, it makes but littie 
difference what sort of thing the security be as long as its value 
is unchanging. Hence, if gold and silver were displaced by iroji, 
for instance, no -one would be subjected to inconvenience or loss. 

Does any one doubt this statement ? What would be the effect 
of the change ? A bank is created with a capital of 1,000,000 
tons of iron. It deposits bonds which are deemed equivalent in 
value to the iron with the United States Treasurer, and receives a 
circulation for nine-tenths of the metal, that is, bank notes promis- 
ing to pay all who take them iron in exchange. The notes of the 
bank circulate because they are secured by the bonds ; it is of no 
consequence whether the bank has a pound of iron or not, for no- 
body wants any. AH the bill-holders want to know is that their 
bills are fully secured; and so long as this is the case, they are 
content. Of course, a part of the security consists in having the 
property in which the bills are finally to be redeemed of as nearly 
a fixed value as anything can be. If, therefore, iron has as fixed 
a value as gold, it will answer just as well as a basis for money. 

But one may say, iron is of various qualities. Very true, but 
that will cause no difficulty. The bank makes its notes payable 
in a particular quality of iron, and every other kind of iron might 
be graded by that. For example, the iron coming from the Iron 
Mountain in Missouri, we will say is taken as a standard. 
Rated by that, we will say that the iron of Michigan is worth a 
quarter less or a quarter more, that the iron of New York is 
worth half as much, and so on. Every quality of iron in the world 
could be easily rated according to the standard, and every bank 
could make its notes payable in standard iron or other kinds, ac- 
cording to their value, measured by the iron of standard quality. 
As there is a great abundance of iron in the world, and as it 



Il6 THE MONEY OF THE FUTURE. 

must always be used, no trouble would ever arise in getting it to 
redeem any promises for which iron was pledged in payment. Iron 
has value for the same reasons as gold. The two are in the same 
category. If gold and silver become worthless so that they could 
not be used as money, there would be no difificulty in supplying 
their place, for the use of iron as a measure of value and paper 
as a representative for iron as a medium of exchange, would sub- 
ject us to no inconvenience, and the world hardly know that a 
change had been made. 



X. 



THE GOOD AND EVIL OF BANKING. 



Many advantages are derived from banking. These may be 
briefly mentioned. Banks are useful places for the deposit of 
money. They also collect it from all quarters in small and large 
sums from people having no use for it, and loan it to others 
who have. Another benefit is that they transmit, by means of 
drafts, money due in one part of the country to another, with- 
out sending gold or silver, or even bank notes in payment. In 
Gilbart's Practical Treatise on Banking* a number of advantages 
are recounted in addition to those mentioned, some of which 
seem quite curious in these latter days of conducting- a bank- 
ing business. 

Evil also is blended with the good. Commercial and finan- 
cial panics, those disasters which are dreaded like war or pes- 
tilence, are one of the evils attending the banking system. 
Before the existence of banks these calamities were unknown. 
" What," says Prof. Price, " is this element, this distinguishing 
characteristic, of a modem crisis ?" . . . The essence of the 
disorder is a phenomenon of banking. Without the banks there 
may be loss, there may be ruin, but there cannot be that pecu- 

* Section ii. 



n8 THE GOOD AND EVIL OF BANKING. « 

liar disorder which is popularly known by the name of a crisis 
or a panic. It is the commotion within the banking region 
which generates this specific malady."* 

The panic of 1873 in the United States is an exception. 
The banks did not originate it, nor were they a co-operating 
cause, unless the aid rendered to speculators may be regarded as 
aggravating the panic. The part they played in this disaster will 
be considered in a subsequent chapter. 

As it is necessary to dissect to some extent the parts of a 
bank if we would, know how panics are produced, we will begin 
first with its resources. Our attention shall be confined to three 
items. 

First, is the capital of the bank which is invested largely in 
bonds and other securities. At present most of our banks of dis- 
count are organized under the National banking law, which 
requires the investment of their capital stock in the bonds of the 
National Government. 

Secondly, may be mentioned the loans of the bank. These are 
made payable at various times, but generally within four months, 
rarely exceeding six, while many are payable in sixty days or 
even a shorter time. The funds loaned consist of bank notes 
issued by the lender, and deposits. Many people suppose that 
the greater portion of such loans are the notes of the lender, but 
this is a mistake. Thus, the return of the Chemical National 
Bank of New York City to the National Government for 1869 
showed that its loans amounted to $3,956,415.06, but not a sin- 
gle bank note was its own. Its loans, therefore, were made from 
the $5,352,803.94! of deposits in the possession of the bank. 

* A^. Brit. Rev., vol. 53, p. 235. 

t The bank had $ 12,685 of its old notes as a State bank outstanding, but this is not worthy 
of mention in comparison with the discounts. 



THE GOOD AND EVIL OF BANKING. II9 

Take Sir John Lubbock's bank. He has given us the analysis 
of ^19,000,000 paid into it; what does this analysis show? 

Checks and bills jQ 18,395,000 

Notes 487,000 

Coin II 8,000 

Three per cent, only of the whole amount paid in consisted of 
bank notes, one-half of one per cent, was coin, while the remain- 
der, ninety-six and a half per cent., was checks and bills. 
Deposits, consisting very largely of checks upon other banks, fur- 
nish the staple out of which the loans of banks are granted. 
Coin and bank notes are only small change. Again, to whom 
are loans made ? Every bank has a number of persons, often a 
very large number, who usually are depositors as well as borrow- 
ers. They need loans to meet payments which are constantly 
falling due in business, and which must be discharged else the 
credit of the customer — merchant, contractor, whoever he may 
be — is destroyed. He relies upon the bank for assistance. The 
amount of assistance given is dependent, to a large extent, upon 
the amount of deposits the borrower may have there, and his 
ability to pay. In this way the custom is created by which the 
merchant confidently looks to his bank for pecuniary help to 
carry on his business, and likewise the bank looks to the mer- 
chant for the receipt and employment of its funds. This is a 
mutual benefit, for the merchant could not conduct his business 
so successfully, if at ^11, without the means thus obtained; and 
the bank would lose all profit on its notes and deposits if they 
were not employed. 

Thirdly, the reserve. Under the State-bank system, the banks 
were required to hold a certain amount of specie with which the 
notes issued by them could be redeemed. Those transacting busi- 



120 THE GOOD AND EVIL OF BANKING. 

nes's under the National banking law are required to hold the 
legal-tender notes of the United States in place of specie. The 
country banks must have a reserve of fifteen per cent, to redeem 
their circulation; and the banks in the larger cities twenty-five 
per cent. 

Let us now cross over to the other side of the bank — its lia- 
bilities. These consist mainly of deposits, its own bank notes, 
and bank balances. 

First, deposits are the various sums held by the bank belonging 
to its depositors. They are properly called inscribed credits ; and 
are payable on demand. An inventory of them might show 
something like the following : 

a. Checks drawn by the depositor, or others, upon other banks. 

b. Notes of that bank, or of other banks. 

c. Notes of individuals, or bills of exchange running to maturity 
which are deposited for collection, the amount of which is credited 
to the depositor when collected. Such notes and bills of exchange 
owe their existence largely to the sales of merchandise. " The 
sellers have received in payment, not money, but orders to re- 
ceive money; and these orders they lodge with their bankers for 
collection." 

d. Notes of the depositor, or of others belonging to him, which 
are discounted at the bank, and the amount thereof is passed to 
his credit. This is the origin of the greater part of all deposits.* 

Though deposits arise in the several ways above mentioned, yet 
they are held by the banks upon very different conditions, either 
express or implied, which may be understood from the following 
classification : 

* This analysis of deposits is but little more than a re-statement from Amasa Walker's 
Science of Wealth. See p. 148. 



THE GOOD AND EVIL OF BANKING. 121 

a. " Permanent or compulsory deposits made by business men 
wishing for bank accommodations, in order to secure larger 
loans." 

b. " Fiduciary or trust deposits, made wholly for temporary 
safe keeping, by executors, guardians, treasurers of corporations, 
etc., who are receiving funds to be paid out, or invested at a 
future period." 

c. " Active deposits, made by business men, to be withdrawn to 
meet current payments."* 

Now, all of these deposits may be demanded at any moment. 
And herein consists the peculiar difficulty of banking. The loans 
are made for a fixed time, and the borrowers are paid either in 
the notes of the discounting bank, or of other banks, while the 
persons into whose hands these very funds may fall, can take 
them immediately to the banks issuing them, and demand instant 
payment thereof, either in specie or legal tenders, according to 
the tenor of the notes. In other words, the loans of banks are 
made payable in a given time, although the deposits and bank 
notes which furnish the basis for making loans are payable on 
call. How, then, it may be asked, can a bank ever make loans, 
in safety ? Simply because people do not demand their deposits 
as soon as made ; t and because they do not demand specie or 
legal tenders in payment of bank notes as soon as they are re- 
ceived. It is true that depositors are constantly using a portion 
of their deposits ; nevertheless, a large portion is left with the 
bank, which would remain unemployed unless loaned. That por- 
tion, which depositors thus suffer to remain for a longer or shorter 

* Walker, p. 149. 

t Deposits circulate from owner to ownv on an average once in three and a-half days, or 
100 times in a year." George Opdyke, " New View of the Currency Question." Bank. 
Mag., vol. 13, p. 423. 



1-22 THE GOOD AND EVIL OF BANKING. 

time, is generally known. Besides, as depositors are, in many 
cases, borrowers, it is customary for them to have more or less 
upon deposit, in order to get necessary accommodations. " The 
permanent or compulsory deposits are not used at all by those 
who make them. They are made with the tacit understanding 
that they are to remain in the bank, and not to be drawn upon. 
They are made to secure favors from the bank, and in order to 
show a 'good account.' No bank, perhaps, compels its customers 
by any law or rule to do this; but custom in such case is as im- 
perative as law. Banks are conducted wholly with reference to 
profit, and the most profitable accounts will secure the most 
liberal discounts. These deposits constitute a permanent loan to 
the banks, without interest; and the banks can loan the same to 
their customers on interest."* The custom determining the por- 
tion of discounts that shall be left with banks is variable. A cor- 
respondent, in 1857, wrote that the custom "very extensively" 
prevailed in the New York banks " of discounting large amounts 
of paper, with the express understanding or agreement that one- 
quarter or one-half shall lay in bank till another discount is ob- 
tained upon the same condition."! We may remark, by the way^ 
that this custom looks very much like another mode of taking 
usury. 

It is upon such deposits, and their own notes, that banks are 
able to make loans to individuals. For it is evident that if the 
banks coiild not ascertain, with any certainty, the amount of de- 
posits that would probably be withdrawn in a given time, they 
could not loan any portion thereof. So, if their own notes were 
constantly returned for payment in specie, legal tenders, or what- 
ever the law requires must be paid 'for them, the banks would 

* Walker, p 149. 
Bank. Mag., vol. 12, p. 470. 



THE GOOD AND EVIL OF BANKING. 123 

not dare to put any in circulation ; indeed, it would be folly 
for them to make the attempt. But as every dollar of deposits 
may be instantly withdrawn, as there is no law or imperative 
custom to prevent this, and as there are occasions when this has 
been, or attempted to be, done, and which may arise again, con- 
sequently, banks are always occupying an exposed situation which 
the wisest foresight sometimes fails to protect. Moreover, when 
those occasions arise in which depositors generally demand their 
loans, the banks are least able to repay. 

Secondly, another form of bank indebtedness consists of their 
own notes. Under the National banking act, the quantity that may 
be issued by any bank does not exceed ninety per cent, of its 
circulation. They are secured by United States bonds deposited 
with the Comptroller. As these bank notes are always redeemable 
in the circulation of the general Government, National banks are 
required to keep a certain quantity of it on hand in order to 
redeem their own notes when presented. 

Lastly, we may mention bank balances. This form of indebted- 
ness is worthy of notice, for we shall see hereafter that they have 
played a most important part in aggravating the evils of financial 
panics. They are de})osits due from one bank to another. In 
August, 1857, the banks of the city of New York owed other 
banks nearly one hundred millions of dollars,* a part of which 
sum had been left with them to meet various liabilities, although 
the greater portion had been tempted thither by the payment of 
four to six per cent, interest. 

Thus much is all that need be said upon the anatomy of a 
bank, in order to understand how it originates a financial crisis. 
To one familiar with the business of banking all that we have 
said was known before ; to others it was indispensable. 

* Bank. Mag., vol. 12, p. 334. 



124 THE GOOD AND EVIL OF BANKING. 

How, then, does a bank bring about so dire a calamity as a 
financial crisis ? It will be found, upon examination, that the 
banks have always produced them by withholding their customary 
loans ; or, in other words, by withdrawing their confidence in the 
ability of their customers to pay. Thus, in the English panic of 
1797, the Bank of England reduced its circulation — which, of 
course, was done by refusing to discount — from ^ 16,017,510, on 
the 28th of February, 1795, to ^8,640,250, on the 25th of Feb- 
ruary, 1797. Discounts were reduced nearly ^2,000,000 between 
the 2ist of January and the 25th of February of the latter year — 
the year the panic occurred.* " But even this gave no true idea 
of the curtailment of mercantile accommodation, for the private 
bankers were obliged, for their own security, to follow the exam- 
ple of the bank. In order to meet their payments persons were 
obliged to sell their stock of all descriptions at an enormous 
sacrifice." On the 25th of February it was felt that the fatal hour 
had come. The next day the bank began to increase its dis- 
counts, and' the relief " produced at the instant " was very great. 
"After taking all the circumstances into consideration," says 
MACLEOD, " we cannot fail to acquiesce in the opinion expressed 
by so many eminent bankers and merchants at the time, by the 
subsequent avowal that experience had led many of the directors 
to repent of the policy they then pursued, and by the decided 
opinion of the Bullion Committee, that the policy pursued by the 
bank in this momentous crisis was erroneous, and that the severe 
restrictions they attempted to place upon commerce, very greatly 
contributed to bring on the calamity by which they were subse- 
quently overwhelmed." t 

* The exact reduction was ;£ 1,910,580. The first English panic occurred in 1793, and was 
produced by a similar cause, 
t Macleod, Theory and Pract. of Banking, vol. i, p. 401. 



THE GOOD AND EVIL OF BANKING. 1 25 

Again, in the English crisis of 1862, for six months previous to 
the event, the Bank of England had been " violently contract- 
ing its issues." This policy was continued till the night of Tues- 
day, the 13th of December, when the crisis was at its height. 
" During the previous forty-eight hours," said Mr. Huskisson, the 
president of the bank, " even the best Government securities could 
not, to any extent, be converted into money ; other stock, of 
course, was still more unsalable; and Mr. Baring said that 
persons would not part with their tnofiey on any terms, nor for 
any security. The prevalent distrust, by invalidating the ordinary 
forms of commercial credit, had rendered a greater supply of 
money absolutely indispensable; yet the bank had been steadily 
doing its best to render money much scarcer than usual. At 
length it found that such measures were undermining its own 
position, and that, if continued for another day, they would 
involve the bank, as well as the country, in a common ruin. 
Accordingly, on Wednesday the 14th, the bank totally changed 
its policy, and discounted with the utmost profuseness. In the 
words of the deputy governor, ' they had (at length !) taken a 
firm and deliberate resolution to make common cause with the 
country.' Instead of refusing to discount, they forced out their 
money in loans in all directions. ' We lent it by every possible 
means,' said Mr. Kearman, ' and in modes we had never adopted 
before; ... we were not on some occasions over-nice; seeing 
the dreadful state in which the public were, we rendered every 
assistance in our power.' " " This policy," says Macleod, " was 
crowned with the most complete success; the panic was stayed 
almost immediately. The mere sight of the bank notes was enough. 
* At Norwich,' said Mr. Richards, ' when the Gurneys showed 
upon their counter so many feet of bank notes at such a thick- 



T26 THE GOOD AND EVIL OF BANlClNG. 

ness, it stopped the run in that part of the country.' By the 24th 
of December the panic was completely allayed all over the coun- 
try, and by the end of the month the credit of the banking world 
was completely restored."* 

The next great crisis was in 1847. The extreme pressure 
began on the 23d of September, when the Bank of England 
adopted more stringent measures to lessen discounts. On the 
15th of October it refused to discount upon either Government 
stock or Exchequer bills as securities, consequently other banks 
hastened to sell their securities, and to hoard the notes received 
in payment. When the Bank of England failed to advance 
on good securities, they were sold for what they would fetch ; 
so that the only effect of this narrow and restrictive policy was 
to create hoarding and panic. Things grew worse daily. Several 
large banks in Liverpool, Manchester, Newcastle, and other towns, 
stopped payment. The drain on the Bank of England became 
greater than ever. As the whole of the commercial world knew 
that the resources of its banking department were being rapidly 
exhausted, a complete panic seized them. A complete cessation 
of private discounts took place. No one would part with the 
money or notes in his possession. On the 23d of October the 
terrible game was played out. The Government, with the view 
"to restore confidence to the mercantile community, . . recom- 
mended the bank directors to enlarge the amount of their discounts 
and advances^ What followed? The, Government letter "was 
made public about one o'clock on Monday, the 25th, and no 
sooner was this done than the panic vanished like a dream. Mr. 
GuRNEY stated that it produced its effects in ten minutes. No 
sooner was it known that notes might be had than the want for 

* Patterson, Economy of Capital, p. lai ; Macleod's Tkeo. and Pract. of Banking. 



THE GOOD AND EVIL OF BANKING. ' 1 27 

them ceased." In the speech of the Chancellor of the Exchequer 
— Sir C. Wood — on this subject, he said : " Parties of every 
description made application to us, with the observation, * We 
do not want notes, but give us confidence.' They said, ' We 
have notes enough, but we have not confidence to use them ; say 
you will stand by us, and we shall have all that we want; do 
anything, in short, that will give us confidence. If we think that 
we can get bank notes we shall not want them.' Parties said to 
me, ' Let us have notes ; charge ten, twelve per cent, for them ; 
we don't care what the rate of interest is. We don't mean, 
indeed, to take the notes, because we shall not want them; only 
tell us that ive can get them, and this will at once restore confi- 
dence.'" Hence, Patterson says "that the restrictive policy of 
the Bank of England was the chief cause of this collapse of 
credit, aggravating a season of commercial difficulty into one of 
most destructive panic."* Had the bank continued its customary 
discounts this panic would not have occurred. 

Let us turn to the financial history of our own country for evi- 
dence of the truth that the panics originating here were occa- 
sioned by the refusal of banks to grant the usual advances to 
their customers. 

The financial crisis of 1817 continued two years. In July of 
the first-named year the directors of the United States Bank 
determined to contract the loans of the institution. The bank in 
Philadelphia was ordered to reduce its discounts to the amount of 
$ 2,000,000, the same reduction to be made at the branch in Bal- 
timore; $700,000 at the branch in Richmond, and $500,000 at 
the one in Norfolk. All of these reductions were required before 
the first of November. In the short space of three months and 

* Patterson, p. 106. 



128 THE GOOD AND EVIL OF BANKING. 

ten days discounts had been reduced four millions and a half. 
This reduction had a very disastrous effect on the merchants, and 
through them on the rest of the community. Yet a still further 
reduction of discounts was ordered, till "the people were 
ruined;" then it was stopped. "For a time," says Gouge,* 
"the question in Market Street, Philadelphia, was, every morning, 
not who had broken the previous day, but who yet stood. In 
many parts of the country the distress was as great as it was in 
Philadelphia, and in others it was still more deplorable." "We 
heard," adds Mr. NiLES,t "of a severe pressure on men in busi- 
ness, a general stagnation of trade, a large reduction in the price 
of staple articles. Real property is rapidly depreciating in its 
nominal value, and its rents or profits are exceedingly diminish- 
ing. Many highly respectable traders have become bankrupts, 
and it is agreed that many others must go as the banks are 
refusing their custo??iary accommodations ; confidence among mer- 
chants is shaken, and three per cent, per month is offered for the 
discount of promissory notes, which, a little while ago, were con- 
sidered as good as ' old gold,' and whose makers have not since 
suffered any losses to render their notes less valuable than here- 
tofore."! 

A committee appointed by the Legislature of the State of 
Pennsylvania to inquire into the causes of the panic got at the 
truth. They reported that the reduction of discounts made by 
the United States Bank, together with the reduction of dis- 
counts by the State banks, had brought about the commercial 
distress recently experienced. 

Passing over the commercial crisis of 1837, which was caused 
by the United States Bank in the same way as the former one, 

* Gouge. Short Hist, of Paper Money, p. 32. t Id. % Quoted by Gouge, p. 32. 



THE GOOD AND EVIL OF BANKING. 1 29 

we will take up the crisis of 1857. It was opened bv the failure 
of the Ohio Life and Trust Company for $ 2,311,268. Although 
many banks and individuals suffered by this loss, ordinarily, it 
would have extended no further. But the failure of a concern of 
such high commercial standing aroused the suspicion of the banks 
in respect to the insolvency of other corporations and houses. 
Their suspicion was confirmed soon after by the failure of the 
New York and Erie, and Michigan Southern, railroad companies, 
and other corporations whose stock and bonds had been con- 
sidered solid investments. To aggravate the evil arising from 
these failures, a powerful combination of speculators in New York 
city devoted themselves to the unholy task of bringing certain 
large undertakings to ruin, and of undermining the National credit. 
Said a New York correspondent of an English newspaper : " A 
large body of active houses are known to be associated for the 
purpose; to influence the press to work out their views, and are 
alleged not merely to operate with a joint capital, but to hold 
regular meetings, and permanently retain legal advisers, whose 
chief vocation, it may be assumed, is to discover points that may 
enable the validity of each kind of security to be called in ques- 
tion, and thus to create universal distrust." * 

The banks began to quake. They thought only of themselves. 
By refusing further discounts they stopped the issue of their own 
notes, and, as loans matured, they received their own circulation 
back again, or that of other banks, for which they could get 
specie, or their own notes by way of exchange through the 
Clearing-House. The loans of the New York city banks were 
contracted $ 25,000,000 between the ist of August and the 24th 
of October. 

^ London Times, Sept. lo, 1857. See Bank. Mag., vol. 12, p. 334. 
10 



130 THE GOOD AND EVIL OF BANKING. 

The result might have been easily foreseen. The borrowers 
were dependent upon the banks for advances to meet many of 
their ordinary payments. They had been accustomed to rely . 
upon the banks for funds; their business had been conducted 
upon the supposition that a certain amount of assistance from this 
source would, if needed, always be forthcoming. Now they sud- 
denly found themselves cut off from the usual advances. Of 
course, those who had not the money, or could not get the 
means necessary to carry on their business, were obliged to fail. 

When the evil consequences of a sudden contraction of loans is 
so apparent, why do banks pursue such an untoward course ? 
For one of four reasons : First, to reduce their own circulation, 
so that when the crash comes they may be able to redeem the 
balance without difficulty. This may seem, at first sight, to be a 
dictate of prudence, but from the peculiar relation in which banks 
stand to their customers, it has always led to the most disastrous 
consequences, first to their customers and afterwards to themselves. 

Secondly, another reason leading banks to decline discounts is 
distrust in the ability of their customers to pay. We have already 
seen that the panic of 1857 began with the failure of several 
prominent concerns of undoubted credit. The failure of these led 
banks to distrust others, and soon a general contraction of loans 
set in. One bank was frightened by the action of another, till the 
refusal to discount among them became general. Individuals fol- 
lowed in the wake ot the banks, so that it was almost impossible 
to obtain loans from any source. 

Thirdly, banks sometimes refuse to discount from lack of funds. 
We have already seen how largely dependent they are upon their 
depositors for loanable capital. This supply may become short at 
any time from three causes : In the first place, loans due a bank 



THE GOOD AND EVIL OF BANKING. 131 

may not be paid at maturity, in which case it does not have 
funds to make new loans. This may happen by imprudent loan- 
ing in the first instance on the part of the bank, or the embarrass- 
ment or failure of a customer from circumstances that could not 
be easily foreseen. In either case the money due the bank is not 
forthcoming, so that it cannot be had to loan again. In the 
second place, the supply may become short from a sudden falling 
oft" in the amount of deposits. This may happen through the 
failure of the customers of the depositor, or diminution in the sale 
of goods, " such as occurs when trade is bad, and stocks of 
merchandise accumulate for want of purchasers, or when the 
harvest is deficient, or when cotton is scarce or dear, and the 
customers of cotton goods reduce their consumption."* In the 
third place, at such times depositors call more generally for their 
deposits. 

Fourthly, it may happen " from a diminution of profits leaving 
a small margin for savings, and reducing the quantity of unin- 
vested savings, which form a large portion of the means at the 
disposal of bankers."! In either case, the deposits fall away at 
the very time when the depositor generally seeks for extended 
accommodations. 

The banks, however, before completely extinguishing the lives 
of their customers, lose their own also. When this is done, the 
panic is complete. Having now shown how banks begin a panic, 
let us follow it up to its consummation. 

IiT attempting to take the lives of their customers, it is strange 
that banks have not seen that the former would defend them- 
selves, and, if need be, destroy their foes in trying to make a 
successful defense. It is stranger still that banks ha\e not seen 

* Price, N. Brit. Kev., vol. 53, p. 241. I /</. 



132 THE GOOD AND EVIL OF BANKING. 

that their destruction was inevitable if customers were inclined to 
destroy these institutions. 

How ? By calHng for deposits and specie. Both bank notes 
and deposits must be paid on call or the bank must fail. From 
this there is no escape. 

Generally, banks fail from their inability to pay depositors- 
This, we think, is true in respect to English panics, without 
exception. It is quite as true in respect to the panics which have 
occurred here. As this hint has not been clearly understood 
among us, it is worthy of considerable notice. Very many have 
supposed that the banks have failed usually because they were not 
able to redeem their notes. Let us see what the truth is. It is 
clearly evident that there never is, nor can be, a run for gold 
apart from a run for deposits. " If the holders of notes," says 
Patterson, "who probably have not more than ^5 or ^ 10 on 
hand, lose faith in the bank, the depositors will still more surely 
take alarm. If a bank cannot pay its notes, how is it to pay its 
deposits ? Hence, the common idea which attributes such panics 
to a real or supposed unsoundness of the note issues, is quite a 
mistake. There would be panics and runs on the bank, though 
they did not issue a single note. The demand for gold in 
exchange for notes is merely an accompaniment (and a compar- 
atively trifling one) of the run for deposits. And such a run, if 
not promptly checked, must prove fatal; for no bank can pay up 
its deposits at once, whether in gold or notes."* 

Take the panic of 1857. The merchants did not want specie, 
but loans. The banks refused to grant them. A large portion of 
the deposits they held were left to secure advances. When these 
were denied, did the banks suppose that such deposits would 

* Econ. of Capital, p. 95. 



THE GOOD AND EVIL OF RANKING. 



^33 



remain? Why should they be kept in the bank when all reasons 
for keeping them there had vanished? Besides, they were needed 
to make payments in order to continue the struggle a little longer 
with the contending elements. Perhaps, too, .a spirit of retaliation 
quickened the determination of some dejjositors to withdraw their 
deposits. The language used by the New York city merchants 
to their bankers was this: "If you think yourselves justified, in a 
time of crisis, in bringing down scores of good firms, as solvent 
and reputable as yourselves, the public are still more justified in 
checkmating you, by requesting you to fulfill your promises to pay. 
Since it is on the plea of preserving the convertibility of the 
note (ivhich we had no thought of questioning), that you produced 
this W'ide-spread suffering, the outraged community may well turn 
round upon you and say, ' Very well, gentlemen, kt us see if you 
can do it.' " The banks, of course, could not do it, and so they 
Avere obliged to close their doors. At the same time the Western 
banks called for their hundred millions of bank balances. It is 
true that in many places specie was demanded, but it w-as not 
distrust in the New York city banks to redeem their notes which 
led their holders to demand payment of them in specie. All of 
the notes were amply secured by the pledge of sound bonds held 
by the State Comptroller, besides the .specie owned by the banks. 
And, in fact, every note was paid. Not a bank in New York 
city failed in 1857 having insufficient funds to pay every dollar of 
its circulation. Their notes circulated without loss of value during 
all the time that specie payments were .suspended. "Even the 
worst crisis which ever befell the Bank of England — the crisis 
of 1825 — so fiir from discrediting its notes, was actually relieved 
by the accidental discovery of a million of unburnt £ i notes. 
Commerce was probably never more severely tried than in 1847; 



134 THE GOOD AND EVIL OF BANKING. 

but the merchants, in their dread of the suspension of dis- 
counts, took to hoarding, not gold, but notes.* It was not con- 
vertibihty of the bank note, as has been so often and so 
groundlessly asserted .by Lord Overstone and his compeers, that 
was felt to be endangered. Men feared that bills might cease to 
be discounted, or that the bank might be unable at the moment 
to pay cheques drawn against deposits." t True, some banks in 
1857 were unable to pay their bill-holders in specie or anything 
else. A run on such banks would have taken place whenever 
their true condition was known ; nevertheless, the run would have 
been as great among depositors, indeed greater, than among bill- 
holders for, if either class were secured, it was the latter. 

We have thus dwelt upon this point, because, if a panic breaks 
out during the existence of the National bank system, it will be 
occasioned by a run, not for legal tenders in exchange for bank 
notes, but by a run for deposits. Assuming that the National 
bonds are a sound investment, and that they will be paid, no one 
will fear the non-payment of the circulation of the National banks, 
for it is amply secured. Let the banks fail ever so generally, 
their circulation will not aggravate a financial panic, for no one 
will lose any portion of it. If, therefore, the banks fail, the 
reason will simply be their inability to pay deposits when 
demanded. 

We have now gone over the ground in respect to the cause of 
commercial and financial panics. We have seen that it is begun 
by the banks which, in destroying their customers, are in turn 
destroyed by them. 

What are the remedies ? The first remedy is that banks must 

* This is what merchants and others did in the panic of 1873. 
t N. Brit. Rev., vol. 30, p. 183. 



THE GOOD AND EVIL OF BANKING. I35 

exercise care in making loans. How often have banks, inipru- 
ilently. nay, even recklessly, loaned their resources? These may 
employed in the [jroduction of additional wealth, or, they may be 
employed unproductively. \Vhether they are employed in the one 
way or the other is determined principally by the banks. They 
are the power disjjosing of the uninvested savings of the nation, 
and deciding, mainly, to what purpose the surplus of corn and 
cattle, the profits of accumulated clothing and goods, the com- 
modities and machmery of all kinds amassed, which constitute the 
national savings, shall be ai)p]ieil. If the resources of banks are 
employed unproductively, they may find it difficult, as they often 
do, in getting their limds. And if such loans are not discharged, 
according to agreement, the banks are deprived of part of their 
resources out of whicli future loans are granted and deposits are 
paid. "Everything," says Prof. Prick, "depends ujton the sa- 
gacity and prudence banks bring to bear on the loans they 
grant." 

Profiting by (he experience of the past, banks have loaned 
more carefully than formerly in respect to security. The com- 
parison is immensely in favor of modern institutions over the old 
ones in making loans to sound parties and loans which are well 
seturetl. The National comptroller has said in one of his reports 
that a very thorough investigation made by skilled accountants 
into the value and condition of the assets of the banks proved 
(hat the bills and notes discounle<l were, to a remarkable extent, 
based upon hona pi/r transactions, while the accommodation loans 
were uniformly safe and well secured. 

Another remedy proposed is to grant loans for a short time, 
but this would not obviate many of the financial embarrassments 
which occur, for in 1857 several of the wealthiest houses in New 



136 THE GOOD AND EVIL OF BANKING. 

York city failed to pay their paper which had only fifteen days 
to run. Indeed, it may be regarded as an open question whether 
the community does not suffer more by short accommodations 
than by longer ones. 

Again, banks should be very slow in withholding their usual 
aid to their customers. It is true that no bank is justified in 
making a loan that will not probably be repaid. But it is the 
universal testimony of nearly all the observers of the various 
financial crises through which this country and England have 
passed, that the banks have withheld their usual advances with- 
out cause. This was the opinion of the Bullion Committee of 
1 8 10, in respect to the English crises of 1793 and '97. The 
same is true in respect to the American crisis of 1819, when 
New York and all the Southern and Western States suspended 
specie payments. Boston continued to make discounts as before, 
though many regarded it as madness for her to do so. But the 
result was that she and all New England were saved from the 
loss which swept over the other States. In the crisis of 1857, a 
writer for the Banket' s Magazine at that time, wrote that "the 
contraction of bank accommodations at New York, it is now con- 
ceded, was unnecessarily sudden and too great. . . . This 
course of contraction is now considered by our leading bank 
directors as unnecessary, and as productive of nearly all the evil 
that has arisen. A more liberal policy would have relieved the 
merchants, and thus would have saved the merchants extraordi- 
nary losses."* Indeed, many of them saw the end of their fatal 
policy, and made an effort to extend their loans; but, as all the 
banks would not agree to this, it was finally abandoned. 
Although the crisis was felt very severely in England, yet its 

* Bank, Mag., vol. 12, p. 430. 



THE GOOD AND EVIL OF BANKING. I37 

worst effects were arrested by pursuing the opposite policy, 
namely, the expansion of loans. By this course the great Ameri- 
can firm of Peabody & Company, which was known to be 
greatly embarrassed, though perfectly solvent, was saved. The 
English bankers had grown wise by their former experience, and, 
instead of Avithdrawing their confidence in the mercantile com- 
munity wtien greater confidence was required, and when confi- 
dence was all that was necessary to save it, that confidence was 
freely given. Had the American bankers been as wise as their 
English compeers, the crisis on this side of the water would never 
have extended its ruffles across the ocean. The truth of this 
assertion is most clearly proven in the fact that the crisis began 
to subside as soon as discounts were renewed. 

Another security against panics is the keeping of generous 
deposits. There is a decided tendency among banks to loan their 
deposits too closely. This arises from the fact that in New York 
and other places interest is allowed on them. This practice can- 
not be too strongly deprecated. Of course, in order to save 
themselves against loss, the banks are obliged to loan their 
deposits as quickly as possible, and ofttimes upon insufficient 
security, or to persons who will not employ them in a profitable 
manner. Moreover, an amount of capital is being sunk in rail- 
way and other enterprises at the present time, which is very 
hghtly considered. In addition to this loss of capital, the indus- 
trial world is greatly disturbed, which has a marked tendency to 
cause a derangement of prices, and to require the withdrawal of 
a greater portion of bank deposits. \Vith the cessation of labor 
comes a decline in the sale of goods, so that the merchant is 
unable to meet many of his payments, which he expected to 
meet from the sale of his products. He, therefore, has to look 



138 THE GOOD AND EVIL OF BANKING. 

to the bank for more extensive accommodations. In short, it is 
safe to say, that in consequence of the greater competition in 
some kinds of business, and the diminution of profits therefrom, 
the depression and derangement in various trades and industries, 
and the loss of wealth in unprofitable investments — all these facts 
and indications should lead the banks to keep a larger portion of 
their deposits on hand, so that they may be able to meet new- 
emergencies that may arise. 

A last preventive of financial crises is co-operation. This may 
seem impracticable in our country, though it has been found 
feasible elsewhere. Thus, in Scotland, in 1857, after the fall of 
the Western Bank, the other banks having central establishments 
in Edinburgh, seeing that the panic was assuming a most destruct- 
ive intensity, resolved to co-operate strenuously in the support of 
each other. " Accordingly," says Patterson,* " as fast as gold 
was withdrawn from the Union Bank and deposited Avith some 
of the other establishments, it was immediately returned to the 
menaced bank. And thus on that critical 12th of November, 
there was a double current of gold passing up and down Bank 
street— anxious depositors carrying off their heavy bags in cabs, 
while steady bank clerks, with equal promptitude, carried back 
the bags to the Union Company. There was a dash of the 
humorous in the operation, but no measure could have been 
more beneficial alike to the banks and to the public. . . . In- 
deed, it is a curious fact that the greatest transfer of accounts 
from the Union Bank, in 1857, was made to the Bank of Scot- 
land, which is only distant some two hundred yards — the panic- 
stricken bearers of gold evidently being anxious to be rid of their 

* Economy of Capital, p. 114. 



THE GOOD AND EVIL OF nANKING. I39 

precious burden as soon as possible, and depositing it accordingly 
with the nearest of the other banks."* 

How marked the contrast between the action and wisdom of 
the Scotch banks and that displayed by the New York City 
banks in the crisis of 1857. When, for instance, the East River 
Bank, on Saturday, the 14th of October, wanted only $20,000 
in coin to sustain itself, and applied to several' large banks for 
assistance, they refused to give it. Instead of making common 
cause with the weaker banks, the stronger ones seemed determined 
to break the others in order to retain their own presumed strength. 
They failed to comprehend their real situation — that the cause of 
the weaker banks was their own, and that by helping these they 
were strengthening themselves. Co-operation, therefore, among 
banks, is the true rule. They should profit by the wisdom of the 
Scotch banks, and by their own. They should remember that 
they stand upon a very thin crust which may at any time be 
easily broken through, and that the difference in thickness be- 
neath one bank and another is not very great after all. 

We think that there are some favoring circumstances to bank 
co-operation even in this country. Most of them are organized 
and doing business under the same system, so that in respect to 
their circulation all are similarly circumstanced. Besides this fact, 

*"The proceeding, we need hardly remark, was perfectly legitimate. The banks to which the 
customers of the Union Bank transferred their accounts became responsible for the sums thus 
deposited with them. That was a terminateo transaction. The lending of the gold by these 
banks to their menaced comrade was a separate affair — amply justified alike by the solvency of 
the establishment to which the loan was made, and by the advantage which resulted from it to 
all the banks, as well as to the community at large. Such united action on the part of the 
Scotch banks, if timeously commerced, is adequate to stop the heaviest run for gold which any 
panic can occasion. To withdraw money in gold is a cumbrous and anxious process. One 
would require a cab to carry away even ;£t,ooo in sovereigns. Moreover, no one is willing to 
run the risks attendant upon keeping a larger sum of gold in his house or office. And, hence, 
as happened in Scotland, in 1857, money which is withdrawn from a bank, not for business 
purposes, but simply in consequence of distrust, is immediately deposited with another bank." 

— Patterson. 



140 THE GOOD AND EVIL OF BANKING. 

there is another of great importance — that the banks grouped to- 
gether in two or three of our large cities really determine the 
action of the rest. The banks located in each of these places 
can support one another quite as well as the Scotch banks, if 
they only will. And if they pursue this policy, rather than the 
unhappy one that has characterized them in the past — of each 
looking out only for itself — no doubt that banks in other places 
will be led to act in like manner, and thus co-operation be secured. 
The foregoing was written before the panic of 1873.* The 
action taken by the banks then, and the splendid effects of co- 
operation, prove the truth of our observations, which are merely 
the deductions of previous experience. 

' Bank. Mag., vol. 26, p. 357. 



XI. 

THE FINANCIAL PANIC OF 187 



A panic is a felicitous term for a disaster such as that which 
overtook the country in the autumn of 1873. Men were panic- 
stricken in respect to their money affairs, just as soldiers are 
sometimes panic-stricken in the presence of the enemy. They 
were frightened, and sold their property at ruinous rates ; or did 
anything else according to the whim of the hour. Men noted for 
their coolness and deliberation, especially in time of severe trial, 
bent before the storm, lost their reason, acted like madmen, and 
sacrificed their property and reputation with scarce a thought of 
what they were doing. They ceased to be masters of themselves. 
The fortunes they had amassed were ruined, and many of the 
institutions they had built up according to the most approved 
manner, as it was supposed, jjerished as lucklessly as their man- 
agers. 

What were the causes of these queer phenomena ? For months 
the panic had been predicted. Shrewd observers could read 
unmistakable signs of its coming. In fact they were not very 
obscure. 

An enormous amount of money had been invested in new rail- 
road enterprises which do not pay, and will not for years to 



1421 THE FINANCIAL PANIC OF 1873. • 

come. The Northern Pacific Railroad is a notable illustration. 
Running through an almost uninhabitable wild for the greater 
part of the way, and constructed thus far at great expense, it will 
cost, when completed, $ 100,000,000, and for twenty years, and 
perhaps longer, no dividends will be declared. Similar enterprises 
have been launched upon the country, in which an enormous 
amount of capital has been sunk. The country is poorer by 
every unprofitable railroad built. True, a portion of capital may 
be invested without the expectation of present gain, but no nation 
can afford to invest more than a small amount in this way. For 
the last six or seven years this country has greatly exceeded the 
limit. It has fixed more capital than it could withdraw from the 
floating mass without creating confusion and distress. 

It may be asked, how was it possible to gather so much 
money for such foolhardy enterprises ? 

To begin with, the judgment of man is not always correct. 
OvEREND, GuRNEY & Co. had a reputation next to the Bank of 
England for being careful and sound bankers, and immense sums 
were deposited with them; yet in six years they ran through their 
colossal capital and became bankrupts. The most careful will 
blunder. Undoubtedly, when Jay Cooke & Co. undertook to 
negotiate the Northern Pacific Railroad bonds, they thought the 
road would be a profitable enterprise. They were too sanguine. 
It is not fair to say that they swindled the public, for the heavy 
advances made by themselves are not consistent with the charge 
of fraud. The millions of their own property buried in this 
undertaking prove that, however defective their judgment, they at 
least were honest. The same may be said of other enterprises. 
Men are continually deceiving themselves. Engineers and con- 
tractors make mistakes in estimates and lead others into trouble. 



THK FINANCIAL PANIC OF 1873. I43 

Many a man supposed to be clear-headed and far-sighted is not 
so in fact. He may have been successful in business, and have 
amassed a large fortune through pure luck. The world judges by 
outside signs, for it can judge by no other, and when success is 
seen its possessor is forthwith credited with ability. A captain 
crosses the ocean fifty times and never meets with an accident ; 
he has had fair weather all the time ; on his fifty-first voyage he 
encounters a gale and is wrecked. When his ability is tested 
adequately he is found deficient, and thus with thousands of men 
in life. They have enough ability for all ordinary enter])rises, or 
they may accomplish some great feat through luck ; but when the 
construction of a great railway is undertaken, and gigantic plans 
are necessary, and wide and careful observation, the ability to 
thus plan and observe is wanting. Numerous projects have been 
floated upon the great names of Wall Street financiers, who are 
found to be as unsound in their heads as in their pockets, and 
grossly ignorant of the magnitude of their undertakings. 

This truth cannot be driven home too deeply, that a great 
many have no ability commensurate with their reputation. They 
honestly suppose they have it, yet are mistaken. Deceiving them- 
selves, they end in deceiving others. Of course, there is no sure 
way of distinguishing tlie truly sound and conservative men from 
those who merely ajjpear so, but it is certain that jjeople should 
have far less faith in the aljility and ofttimes in the honesty of 
others, tiian they do have, and make more careful inquiny before 
entrusting them with money and other property. 

Another reason why many persons have invested in miserable 
schemes is that they are intentionally deceived. It is a lament- 
able fact that men who have acquired an enviable reputation for 
honesty and ability sell out in order to make money. The story 



144 THE FINANCIAL PANIC OF 1873. 

• 

is often repeated. A manufacturer wins a great reputation for 
manufacturing splendid goods. They are wrought of the best 
material, and the work is performed by skillful hands. His 
goods are in demand everywhere. Having reached the summit 
of his reputation, he begins to manufacture goods of an inferior 
quality. He imposes upon the public. Just so do brokers and 
bankers impose upon the public. They are told that securities 
are perfectly sound, that the interest upon them will be promptly 
paid, when the negotiators know that the truth is exactly the 
opposite. Receiving a large commission for their negotiations, 
they allow that consideration to outweigh the ruin of their own 
reputations, and the loss to the deluded holders of such securities. 
They are willing to bear all the odium that will be heaped upon 
themselves for the sake of the reward they are to receive. 

It would be a waste of time and space to recount the projects 
to which men who have achieved a fine reputation have lent it 
and ruined it for a reward. Often when oil, mining, and other 
speculative or bogus companies have been organized, some noted 
names are secured to head these organizations, upon whose repu- 
tation stocks are sold and innocent purchasers beguiled. Many 
are just beginning to open their eyes and find out how they have 
been duped by those in whom they had reposed the greatest con- 
fidence. 

Another way in which the public have been beguiled into pur- 
chasing -railway bonds is by being led to suppose the roads to be 
bonded less heavily, in proportion to their entire cost, than they 
are. Formerly, railroads were built principally by means of stock 
subscriptions, the bonds constituting much the smaller part of the 
capital invested. In those days bonds were safe investments. 
Now, the mode is reversed; bonds are sold for nearly the cost of 



THE FINANCIAL PANIC OF 1873. 145 

constructing the road, and a little stock issued merely to center 
the control of the enterprise in a few persons. 

So long as these bonds constituted only a small portion of the 
capital invested in railway enterprises, they were, in most cases, 
sound investments, and found a ready sale in the market. But, as 
we have just remarked, no sooner had railway bonds become 
popular with investors than the issuers took advantage of their 
high estimation to issue a larger amount of bonds per mile in 
proportion to the stock of a road than formerly. In other words, 
confidence in railway bonds having become strong, railroads have 
terribly abused that confidence and nearly destroyed it. Of late, 
issues have been made upon very inadequate security, and hold- 
ers are likely to incur heavy losses.* 

The last cause which we shall mention inducing the panic, was 
the inflation of the currency. Too much has been issued, and 
the natural res\ilt was imprudent investments. This is not the 
first time a plentiful supply of currency has led to unwise investing. 
Macaulay has narrated the history of former rash investments 
arising from a similar cause. In 1688 there was an excessive 
supply of money in England. " In the short space of four years 
a crowd of companies, every one of which confidently held out 
to subscribers the hope of immense gains, sprang into existence — 
the Insurance Company, the Paper Company, the Lutestring 
Company, the Pearl Fishery Company, the Glass Bottle Company, 
the Alum Company, the Blythe Coal Company, the Swordblade 
Company. There was a Tapestry Company, which would soon 
furnish pretty hangings for all the parlors of the middle class, and 
for all the bedchambers of the higher." A Copper Company 

* See an excellent article in The Nation, entitled The Railroad Mania, in which the 
method of organizing a modern railroad and raising money to build it is succinctly given. 
Vol. 8, p. 185. 

II 



146 THE FINANCIAL PANIC OF 1873. 

proposed to explore the mines of England; a Diving Company 
undertook to bring up precious effects from shipwrecked vessels ; 
and a Greenland Fishing Company could not fail to drive the 
Dutch whalers from the Northern Ocean. The same state of things 
prevailed when the South Sea Bubble broke. Macaulay has 
described some of the companies formed a little before this time. 
" Wrecks to be fished for on the Irish Coast — Insurance of 
Horses and other Cattle — Insurances of Losses by Servants — To 
make Salt Water Fresh — For building of Hospitals for Bastard 
Children — For building of Ships against Pirates — For making of 
Oil from Sun -flower Seeds — For improving of Malt Liquors — For 
recovery of Seamen's Wages — For extracting of Silver from Lead 
— For the transmuting of Quicksilver into a malleable and fine 
Metal — For making of Iron with Pit-coal — For importing a large 

number of Jack Asses from Spain — For trading in Human Hair 

For fatting of Hogs — For a Wheel of Perpetual Motion." 

In these several ways, the pubhc have been beguiled into in- 
vesting very heavily in bonds and stocks that are of very little or 
no value. It is true that after many years, the lands along the 
line of these silent or lightly-traveled railroads will be taken up, 
and then they will pay. Long before that time the stocks and 
bonds will have been sold for a song, and some of those who 
first invested in them will have become bankrupt. Of course, so 
far as the circulating medium is concerned, it makes little differ- 
ence whether it is paid out for profitable or unprofitable enter- 
prises, for there is just the same amount in the one case as in the 
other. But one person can much better afford to throw away a 
part of his capital, or invest it where no immediate return is ex- 
pected, than another. In fact, no person ought to invest in a 
hazardous enterprise, or one where dividends will be long deferred, 



THE FINANCIAL PANIC OF 1873. I47 

any portion of his wealth, the want of which will cripple him in 
business or living, if returns should be long delayed. 

It may be asked, where is the loss in such enterprises ? The 
quantity of money in the country is the same, the laborers have 
had employment, and the rich have paid for it. Has anything 
taken place except a change of this money from the pockets of 
the rich to the poor ? Is not this desirable ? Something more 
has taken place. All the labor of the thousands of men thus 
engaged in unproductive employment has been thrown away. It 
is not the loss of money, but the loss of labor and capital. Sup- 
pose they had been employed productively in improving the high- 
ways and bridges of the United States, for example, what a 
beautiful system of streets and highways would have existed over 
the land ! 

The waking up to the realization that many of the railroad 
stocks and bonds of the country were worthless or very poor 
property, coupled with the failure of some noted houses which 
had been aiding railway schemes, brought on the panic. When 
public confidence began to fail it were easy to depict the conse- 
quences that were sure to follow. For the panic took the same 
course as many of its predecessors, and it was not difficult to tell 
what was coming. The weakening of the prices of some stocks 
at once affected the value of the rest. The entire stock market 
at once became unsettled. Banks which had made enormous 
loans upon stock collaterals began to quake. They saw stocks 
gomg down below the margins, and they at once began to sacri- 
fice their securities to save themselves. This was perfectly legiti- 
mate, and no one could complain; but when the market was 
deluged with great quantities, prices declined violently. Others 
became frightened and wanted to sell. In this way the utmost 



148 THE FINANCIAL PANIC OF 1873. 

confusion was produced, prices grew low, and every one turned 
pale. To enhance the difficulty, many of the houses having large 
deposits payable on demand were called upon to respond. They 
were distrusted. Rightfully, too, for they had no money. It was 
all loaned to speculators, and could not be obtained. The banks 
could afford little help to any one outside of their customers, and 
their wants in many cases could not be supplied, for the banks 
were expecting a large withdrawal of deposits. Stocks continued 
to decline, and the difficulty was aggravated. There was no way 
of preventing it, for- those having confidence in certain stocks, and 
who were desirous of purchasing them, had no money to buy. 
Thus the panic originated in a lack of confidence; first one was 
suspected, then another, and finally nearly all were. When confi- 
dence was broken down more money was needed to do business, 
and the sales of property at ruinous rates were made to get it. 
But so many wanted money there were no buyers, all were sell- 
ers. To suppose that $44,000,000 of legal tenders would have 
supplied the demand for money at this time betrays a great igno- 
rance of the facts. A vast sum was needed because of the 
wholesale destruction of credit. 

It is true the banks were not the originators of this panic, nor 
did they help it on, except in the way of loaning funds to specu- 
lators. When the crisis came the banks conducted their business 
admirably. Remembering their former experience — that in divi- 
sion all must fail — they united and weathered the storm 'which at 
first threatened to overwhelm them. Co-operation saved them ; 
division would surely have caused their destruction. 



XII. 



THE RELATION OF BANKS TO SPECULATORS. 



Speculation in wealth is not the production of wealth. If I 
borrow one hundred thousand dollars to buy stocks, and in three 
months they have risen, while in my possession, one-quarter of 
their original cost, I have produced nothing. I have added 
nothing to the nation's wealth. The stocks existed before I pur- 
chased them ; they exist now without any additional value by any 
effort of mine. This cannot be denied. And the same affirmation 
is true in respect to anything that I may buy. If wheat, for 
instance, is purchased and held for a rise, which afterwards takes 
place, I have added nothing to production ; I have performed no 
labor upon it to enhance its value. No greater quantity exists 
now than existed before. The whole business of speculation, 
therefore, is to be condemned because it is non-productive. To 
this principle there is no exception of a single commodity which 
may rightly form the subject of speculation. Whether speculation 
is in stocks, or in the daily necessaries of life, the principle 
remains the same. 

Perhaps if we delay a moment upon the meaning of produc- 
tion, the truth of this principle may be more apparent. By pro- 
duction is meant the doing of anything to a commodity by which 



IgO THE RELATION OF BANKS TO SPECULATORS. 

its value is increased. Thus, if A goes to Chicago and buys 
wheat and transports it to New York and sells it, he is a pro- 
ducer according to the above meaning of the term. He adds- 
value to the wheat. Labor, or difficulty of attainment is one of 
the indispensable elements of value. Any man, therefore, who 
adds labpr to a thing is a producer, provided his labor be 
desired or has value. The speculator never enhances the value of 
anything; or, if he does, it is not by means of labor, but by 
various practices and arts that are economically and morally 
wrong. 

Hence, we repeat, that speculation is an unlawful calling, and 
is detrimental to every interest of society. The speculator adds 
nothing to the wealth of society; it would be as well off without 
as with him, so far as producing anything is concerned. In this 
respect he is only a blank. Yet if he had simply neutral quali- 
ties, society and commerce would have reason to rejoice. But he 
is the foe of every man who is engaged in production. He is 
the foe ahke of the poorest man who toils for his daily bread, 
and the rich man who is obliged to purchase of him. Do you 
inquire how ? By using the money that is required in produc- 
tion for purposes of speculation. The amount of wealth in the 
world is limited, and it is all needed in producing more wealth. 
It is required by the merchant, the contractor, the railroad, by 
thousands of men and corporations, to enable them to pay for 
labor and other things; in short, to carry on their business, and 
to add to the wealth of the world. Now, it is clear that all the 
wealth employed in speculation is withdrawn from other kinds of 
business. If money is loaned to a ' broker to buy stocks, it is 
diverted from the manufacturer, who needs it to pay for help, or 
to buy cotton. In order, therefore, for the manufacturer to get 



THE RELATION OF BANKS TO SPECULATORS. 1^,1 

it, he must pay a higher rate of interest than would be paid if 
no money were diverted into speculative channels. The manu- 
facturer, in turn, must sell his goods for a higher price, which 
is ultimately paid by the consumer, and thus the fact rises to the 
surface, that speculators are the foes alike of the rich and the 
poor, because they enhance prices by diverting from production 
the wealth that is needed for this purpose. 

Speculation is to be condemned on two grounds: First, because 
it is a non-productive business ; and, secondly, because it diverts 
wealth from productive business, thereby disturbing prices and 
adding to the burdens of society. But it is said that speculation 
is not always detrimental to the welfare of society. Thus, The 
Nation, in 1866, said that "speculation in gold (during the war) 
had certain beneficial results which outweighed its evils. It tended 
to keep gold in the country, by giving its holders the continual 
prospect of an advance, without which it would all have left the 
country in 1862, and have remained abroad until the close of the 
war, since it would have been quite useless here, and a mere 
dead-weight upon its holders. Abroad it would have drawn inter- 
est; here, it would not. The chances of speculation, however, 
seemed to promise something better than interest at foreign rates, 
and an immense amount of gold was kept here, to the obvious 
strengthening of the National credit ; both the Government and 
the banks having always a handsome specie reserve. The very 
excess of speculation tended to produce this result, as it made 
shipments decidedly unprofitable, and foreign exchange unsalable. 
Thus we closed the war with a very respectable stock of gold, 
which then became available to the public at prices which were 
only too moderate."* 

* The Nation, vol. 2, p. 809. 



152 THE RELATION OF BANKS TO SPECULATORS. 

It may be fairly questioned whether " speculation in gold 
outweighed its evils." Prices were unsettled, causing greater loss 
and suffering. Any business that unsettles prices is, generally, 
to be condemned. One of the worst evils that can befall so- 
ciety is to have prices in an unsettled, fluctuating state. Thous- 
ands of people lose by a change in the price of merchandise. 
Yet this unsettled, disturbed state is brought about by speculation. 
Indeed, it is the state in which the speculator most delights to 
live. So long as the ocean of trade is calm, the speculator is 
like a ship with its sails^ uselessly suspended in the air ; he does 
not move. On the other hand, the merchant, like a steamboat, 
passes over the surface of the untroubled waters, all the easier 
and steadier because there is no disturbing breeze. But when the 
wind springs up, then the speculator rejoices, for he can fill his 
sails and steer his vessel across the intended track of the trader, 
rendering his future more difficult and uncertain, by causing a de- 
rangement of prices, and by baffling the interests and prospects of 
trade. Not only were prices unsettled and capital diverted by 
speculation in gold, but industry and ability also. Thousands who 
were needed in other callings, forsook them to follow the bewitch- 
ing life of a speculator. Or, if they continued in their former 
occupations, their minds were not chained to work as before. 
But is it true that speculation " tended to keep gold in the 
country ?" If it did tend that way, then we have this curious and 
melancholy fact, that gOld was more potent to the speculator for 
the purposes of speculation than to the trader for the purposes of 
exchange. Was this true ? It may have been, but it is hard to 
believe that speculation competed so successfully with the regular 
demands of commerce, that it became the omnipotent master of 
the universally recognized instrument of exchange. But if it did 



THE RELATION OF BANKS TO SPECULATORS. 1 53 

— if gold was kept in the country by speculation, was it " to the 
obvious strengthening of the National credit ?" Certainly, not all 
the gold in the country belonged to the National Government, and 
the portion not so owned, could have had very little influence in 
the " strengthening of the National credit." And if we owed debts 
abroad which only gold could discharge, was the National credit 
more strengthened by the existence of such a strong spirit of 
speculation that gold was tempted to remain here as an instru- 
ment of speculation, than the National credit would have been 
strengthened if the gold had been sent away to discharge that 
indebtedness ? 

The Nation also alludes to speculation in food, that it " is often 
censured with special severity. Yet," it says, " there is nothing in 
which it is more plainly beneficial. Were it not for speculators, 
the farmers would be utterly unable to sell plentiful crops, while 
the price paid by consumers would be so low as to lead to 
extreme wastefulness. When in the course of nature a barren sea- 
son came round, there would be no stores laid up against it, and 
all the desolations of famine would follow. Joseph and Pharaoh 
were, perhaps, the greatest speculators on record; and what 
is clearer than that their speculation in corn was the salvation of 
Egypt?" Now we apprehend that the defect in this mode of 
reasoning is, that the business of an exchanger who is a producer, 
is confounded with that of a speculator. A man, it is true, may 
purchase for the sake of the reasonable gains to which he is 
entitled, and for nothing more ; he is then only a producer. But 
he may also purchase with the expectation of an additional rise 
which may take place, from the simple fact that by purchasing all 
the wheat in the country, for instance, its price may be controlled. 
What we condemn is, the purchase of the wheat for this latter pur- 



154 *HE RELATION OF BANKS TO SPECULATORS. 

pose. Supposing that it was not purchased for this end, is it true 
that " the farmers would be utterly unable to sell plentiful crops ?" 
If wheat is needed, will it not be purchased by the regular pro- 
ducer, merchant, or exchanger, even though a speculator is 
unknown ? The writer says, " Were it not for speculators, the 
farmers would be utterly unable to sell plentiful crops." Is this 
true? Would the merchant fold his arms and stop his ears so 
that he could not hear the demands of his customers, while the 
granaries of the farmers were filled to bursting ? Would he forego 
the reasonable profits that could be made on the purchase and 
sale of wheat to his customers, if unable to reap the gains of 
the speculator? Such is the effect of The Nation's argument, 
and yet we see that it is all knocked over by the latter part of 
the very sentence just quoted. For he adds : " The price paid by 
consumers would be so low as to lead to extreme wastefulness." 
But he had previously said that " the farmers would be utterly 
unable to sell plentiful crops were it not for the speculators." Is 
it possible to harmonize these statements ? If " the price paid by 
consumers would be so low as to lead to extreme wastefulness, 
were it not for speculators," then evidently, the people could 
obtain the crops without the speculators, for they could not waste 
what they did not have, and, of course, the farmers would be able 
to sell their crops. Nor do the farmers get any more for their 
produce by selling it to the speculators, ordinarily, than they would 
get if they sold directly to the wholesale or retail merchants or 
their consumers. 

In regard to the husbanding of stores for periods of scarcity, 
there is no speculation in this. We have said that speculation 
consists in obtaining control of the supply of a thing, so that the 
price thereof can be fixed by the holder with the intention of sell- 



THE RELATION OF BANKS TO SPECULATORS. 1 55 

ing at more than a reasonable profit. But Joseph and Pharaoh 
were not speculators, because, apprehending a famine, they pro- 
vided against it by storing up an extraordinary quantity of pro- 
visions. There is no speculation, necessarily, in the purchase of a 
large quantity, but only when the owner takes advantage of the 
fact to charge an extraordinary and wrongful price for the same. 
Consequently, Joseph and Pharaoh were not speculators, unless 
they sold at such a price ; and if we remember correctly, there is 
no proof that they did. It may be that with these e.xplanations 
there w'ould be no contrariety between the writer of the article 
above alluded to and ourselves; that the difference has arisen in 
consequence of not developing the subject as fully as we have 
done. 

We believe the rule of pure morality requires that only a rea- 
sonable profit be sought upon any kind of product. What such 
a profit is depends upon circumstances. If a business involves a 
tremendous risk, a reasonable charge is greater than in a business 
unaccompanied with risk. Thus the fruit-dealer is justified in 
charging more for his fruit which is perishable, than a wheat- 
dealer for wheat which will keep. When the Atlantic cable was 
laid and put in successful working, the company was justified in 
charging more on account of the greater risk, and to get back 
the money sunk in previous unsuccessful attempts. But advant- 
ages are not to be taken of the scarcity of the market to force 
up prices, much less to make the market scarce by buying all the 
goods of a particular kind that are likely to be in demand. 
When prices are sought to be influenced by any unfair means, 
there is no excuse for loaning money to help on the movement. 
Every one knows that railroad stocks are worth, generally speak- 
ing, quite as much one day as another; yet their prices are 



156 THE RELATION OF JBANKS TO SPECULATORS. 

always fluctuating, and a great many buy, hoping to gain by 
these changes. They are caused, generally, by unfair means, by 
the meanest stories and canards. It is an immoral business to 
purchase stocks for speculative purposes, or to loan money to 
those who wish to do so. Banks have no right to help specu- 
lators of any kind. 

It may be asked, what business has a bank to inquire of its 
customer what he proposes to do with his loan ? It is sometimes 
the duty of a bank to make such inquiry. Should a banker sus- 
pect that an applicant wanted a loan of a thousand dollars in ten 
one-hundred- dollar bills for the purpose of counterfeiting them, he 
would not have the right to make, nor would he make *such a 
loan. Neither is it right for a bank to make a loan which is to 
be used in payment for real estate. 

Formerly, it was the custom of banks to assist only those who 
were engaged in productive occupations — merchants, manufactur- 
ers, and the like. We admit this custom has been thrown away 
and another adopted, namely, that he who pays best shall be 
first accommodated, without considering or caring to what use the 
money is to be applied. Instead of telling the borrower that he 
must engage in some productive business if he wishes to have 
assistance from the bank, the only thing apparently thought of is 
the rate of interest and the security. If the most unprincipled 
speculator in Wall Street pays a good rate of interest, and fur- 
nishes good security, the bank makes no further inquiry. , 

Banking capital is designed to aid men in business, to facilitate 
exchanges, in paying for labor, goods, and the like, and not in 
erecting buildings, paying for real estate, or helping speculators. 
Fixed capital should come from individuals and savings institu- 
tions, not from banks of discount; hence, every application to a 



THE RELATION OF BANKS TO SPECULATORS. 1 57 

bank of discount for a loan for either of these latter purposes 
should be at once declined. 

Besides, a National bank has no right, according to law, to do 
this. It is wrong not only in an economic and moral point of 
view, but it is contrary to the spirit and intent of the National 
bank act, under which most of our banks live and do business. 
A government official* has rightly said that " a charter to carry 
on the business of banking does not give power to buy or sell 
real estate, to ship goods to a foreign port, or to engage in or pro- 
mote any speculative operation." 

It cannot be denied that our banks, especially in the larger 
cities, assist speculators to an enormous extent.t Thus we find in 
the United States Comptroller's report for 1868, that "the bank 
statements of New York, taken separately," show the loans of 
the banks in that State to have been substantially as follows : 

Commercial or business paper $90,000,000 

Demand loans 68,500,000 

Accommodation loans 3,500,000 

Suspended loans 1,500,000 

Total $ 163,500,000 

Nine-sixteenths of these loans are legitimate business paper; 
" the amount loaned on call for commercial purposes is not 
stated, but reliable information leads to the belief that it is very 
small." Merchants cannot use to advantage money payable on 
call, as the goods which they buy with it cannot be instantly 
converted into cash. But stock and gold speculators can almost 

* United States Comptroller of the Currency, report of 1869. 

t The only notable refusal of banks to loan speculators is that of the Western banks tn the 
grain speculators in the summer of 1870. — The Nation, vol. to, p. 416. 



158 THE RELATION OF BANKS TO SPECULATORS. 

always realize on these forms of property very quickly, so that 
they are able to use money payable on call with profit. Hence 
the United States Comptroller has drawn the inference, " that 
nearly one-half of the available resources of the National banks in 
the City of New York are used in the operations of the stock 
and gold exchange." 

" In addition to this direct loan of $ 70,000,000, they furnish 
facilities by means of certified checks to the same class of opera- 
tors, ranging from $110,000,000 to $120,000,000 daily (on the 
5th of October the amount was $112,800,000). Taking the call 
loans and the certified checks together, the somewhat startling 
fact is developed, that the New York National banks furnish 
$70,000,000 of capital and $112,000,000 of credit for speculation, 
or one hundred and eighty-two million of dollars." We have no 
later returns from which we can correctly ascertain the amount 
loaned by the banks to the speculators, so we must content our- 
selves with these. But we have no reason to suppose that the 
banks have been less indulgent to the speculators since this report 
was made. 

The loaning of bank funds to speculators is not an evil of re- 
cent date. 

Perhaps the most noted example of reckless loaning in this 
country was by the Second United States Bank chartered by 
Congress in 1816. Its capital was $ ^5,000,000. The operations 
of the bank having become very corrupt, in 1841 a committee 
was appointed by Congress to examine into its affairs. And what 
did they find? On the 21st of December, 1840, loans were 
made to several incorporated companies amounting to $ 1,211,163, 
including one of $ 502,222 to the Wilmington Railroad. Dis- 
counts to the amount of $ 740,056 had been made with at least 



THE RELATION OF BANKS TO SPECULATORS. 1 59 

six months to run ; and the balance was loaned payable in one 
year. Nine companies had discounts of over $ 100,000 each. A 
great deal of suspended indebtedness was discovered. Fifty-two 
individual firms and companies were severally charged with more 
than $ 20,000 ; twenty-nine had debts exceeding $ 50,000 each, 
and nine having each a debt of $ 100,000. Six concerns were 
charged with $ 2,314,000. One firm in Philadelphia, between 
August, 1835, and November, 1837, received accommodation to 
the extent of $4,213,878, more than half of which was obtained 
in the year 1837. Mr. Samuel Jaudon, when he resigned as 
cashier of the bank, upon being appointed as its foreign agent, 
was a debtor to the extent of $ 408,389, and the ingenious reason 
given by the directors for giving him an enormous salary as 
cashier, was on account of his heavy indebtedness to the bank. 
A former cashier was charged with $ 104,000. At the same 
time, the first assistant cashier was indebted to the bank in the 
sum of $115,000, which was finally increased to $326,382. He 
then graduated as assistant and was made cashier of the institu- 
tion. If any one would like to know what the two last-named 
officers did with their funds, it may be answered that they in- 
vested them in the Camden and Woodbury, Wilmington, and 
Grand Gulf Railroads, and in the Dauphin and Lycoming coal 
lands. When the stocks of these various companies were given 
up as worthless, they were transferred to the bank in satisfaction 
of the indebtedness of their holders. In 1836 the amount loaned 
upon the pledge of " fancy stocks " was nearly $ 20,400,000. The 
same year an advance was made to A. G. Jaudon to enable him 
to purchase cotton which was remitted to Baring, Brothers & 
Co., of Liverpool. " The derangement of the currency," said Mr. 
Biddle, when explaining the effect of this purchase to Mr. 



l6o THE RELATION OF BANKS TO SPECULATORS. 

Adams, "placed the staples of the South entirely at the mercy of 
the foreign purchaser, who could have dictated the terms of sale 
to the prostrated planter. It was thought proper to avert the evil 
by employing a large portion of the capital of the bank in mak- 
ing advances on southern produce." 

Why have banks assisted speculators so much ? First. — As 
deposits are generally made payable on call, banks have believed 
it to be a wise policy to loan large portions in this manner; 
for, if they are asked to pay heavy sums, they can easily be ob- 
tained. If loans were made to brokers with stocks and gold as 
collateral, the loans were safe, and they could be repaid at a 
moment's notice. The banks never dreamed that if a great many 
wanted to realize quickly, no one could; and, consequently, that 
such loans were not more likely to be paid than others. 

Secondly. — By making call loans, a greater portion of deposits 
can be loaned. The banks do not dare to loan all their funds 
upon time, because these institutions are liable to heavy demands 
at any moment. In making call loans, however, they can dis- 
count more heavily as they can call in such loans whenever they 
desire. By this policy dividends are increased. 

Thirdly. — Speculators have offered higher rates for money. It 
is humiliating to us as a nation, that speculators have for years 
been able to outbid legitimate and healthy business for money. 
Yet, having offered rates of interest which merchants could not 
afford to pay, speculators have been accommodated and mer- 
chants left without help. 

Fourthly. — Another reason impelling banks to make call loans 
was that, as they had encouraged deposits by offering interest at 
three to five per cent, on them, it became necessary to loan these 
deposits to avoid loss. The only chance to make anything was 



THE RELATION OF BANKS TO SPECULATORS. l6l 

to loan immediately and at higher rates than those paid to 
depositors. They had, it is true, the precedent of banks abroad 
for offering interest on deposits, though few of them offer so much 
as do our own. The banks have thus diverted a large portion of 
their resources to speculative purposes.* Not all the banks have 
been guilty of this. The offenders are principally in New York 
City, and even there many honorable exceptions may be found. 

We have given some of the reasons for condemning speculation. 
We have seen that banks greatly assist speculators by loaning them 
funds to carry on their operations. The question arises, how can 
banks be prevented from rendering this assistance ? 

Prohibit, by law, the payment of interest on deposits. The 
custom of paying interest on deposits has found many defenders 
and opponents. It unquestionably tends to increase deposits, but 
the evils arising from the improper use of them, if interest be 
paid, far outweighs the benefits of resorting to this method of 
encouraging an increase. This remark has no application tt) the 
payment of interest upon special deposits — that is, those made 
for a specified time, but only to those made daily and in the 
usual course of business. To pay interest on these — especially 
to pay high rates — we believe to be contrary to sound banking. 
After the terrible crisis of 1857, the Clearing-House Association of 
the New York City banks appointed a committee to investigate 
into this subject. At that time all except six out of forty-six 
banks composing the association united in an agreement not to 
pay interest on deposits. This fact was stated by the committee 
in their report. The subject was considered by them with marked 

* It is a thing of common occurrence for merchants, manufacturers, and others who 
denounce the action of banks in loaning to speculators, to loan their own deposits to such 
banks, in order to get interest upon them. Thus their greed for gain leads men to feed the 
speculators whom they denounce. 



1 62 THE RELATION OF BANKS TO SPECULATORS. 

ability, and the conclusions at which they arrived were summed 
up near the close of their report. The practice of paying inter- 
est upon deposits they declared was, — 

1. Inherently unsound. 

2. That it tends to weaken the legitimate commerce of the 
country, and to disturb the regularity of the business of the city. 

3. That no bank can safely and profitably practice it. 

4. That it tends to interfere with the efficiency and stabiUty of 
our banks, and with the harmony of their intercourse with each 
other. 

5. That its discontinuance will not divert any substantial depos- 
its from this city. 

6. That the reasons for its discontinuance are daily increasing. 

7. That it has, under like conditions, no fair precedent in older 
countries. 

8. That, as it exists here, it has been unjustly applied. 

After sixteen years more of experience in banking, the same 
Ciearing-House Association appointed another committee to con- 
sider "What reforms are required in the operations of banks with 
each other and the public to increase the security of their busi- 
ness ; and, first and most prominent, they recommend that the 
banks entirely discontinue the payment of interest upon deposits, 
whether directly or indirectly." 

With this accumulated experience before us, the National Gov- 
ernment ought not to hesitate in enacting a law forbidding the 
payment of interest upon deposits. The fact that a different cus- 
tom prevails abroad is of no force here, because our monetary 
system is so unlike any other. Besides, the Bank of England, the 
largest in the world, has never paid interest on deposits. Let 
such a law be passed and banking will become a sounder busi- 



THE RELATION OF BANKS TO SPECULATORS. 1 63 

ness, while the country at large will be greatly benefited by the 
severe checks which speculation must receive.* 

It will be said, why interfere with the action of the banks? 
Why not permit them to act according to their own judgment ? 
The common saying among bankers is : " Take care of the cur- 
rency ; make that as secure as possible, but do not interfere with 
the business of the banks." What is implied in this saying ? It 
is that banks have the right to manage their own affairs, and that 
if allowed to exercise it, banking would become a more profitable 
business. This is the reason why they so loudly clamor for non- 
interference in their concems.t Profits are reduced thereby. 
Moreover, many bankers are very outspoken in their claim that it 
is beyond the scope of the government to undertake the super- 
vision and direction of banks. To this claim they add this addi- 
tional consideration that whenever the government has undertaken 
the supervision and control of them, no benefit has resulted there- 
from, either to the banks or to the public. 

Banks are corporations created by the government, not for the 
good of the corporators alone, but also for the good of the pub- 
lic. Corporations, in general, seem to be quite innocent of this 
truth now-a-days. They have grown to think that corporations 
are wholly one-sided affairs, created only for the benefit of them- 
selves, and therefore that the government has no right to put any 

* It is evident that if the banks are forbidden to pay interest on deposits, of course, the 
country banks will thereafter retain all of their own deposits. It is true that it would be neces- 
sary to keep small deposits with the city banks in order to have the drafts upon the city 
banks paid upon presentment. But all the deposits of country banks, beyond the quantity re- 
quired for this purpose, would be retained. Hence the city banks would be deprived of these 
numerous and perennial fountains from whence speculators have been fed. In 1870, the 
amount thus furnished by the country to the city banks amounted to $ 72,272,790.36. The 
speculators, therefore, would be so weakened from this loss of blood that they could not carry 
on their operations with the same degree of energy as before. 

t See article in Banker's Magazine — Banking Amendments — July, 1870. 



164 THE RELATION OF BANKS TO SPECULATORS. 

checks in the way of their earning the greatest gains. The time 
has fully come when corporations must unlearn this error, and 
remember that they are endowed . with corporate life, not for their 
good merely, but for that of the public. It is very absurd 
to suppose that the government creates an institution to prey 
upon the pubhc, and from which it is to derive no benefit. If 
the government, by mistake or otherwise, has endowed such an 
institution with a legal existence, it should be removed as speedily 
as possible. A corporation which is not beneficial to the public 
as well as to the corporators, has no place in a well-organized 
society. Is it not true that corporations gain more from the pub- 
lic than the public from them ? Indeed, would one ever be 
created if this were not the case ? And if such be the case, may 
it not be doubted whether the government should ever create a 
corporation ? Surely, if such institutions are authorized, the 
government ought to watch over them with a j ealous care, lest the 
public suffer too much, rather than the corporators lose too much, 
therefrom. The banks must remember that they are corporations, 
and consequently that the government has a right to interfere, 
and that it is the duty of the government to interfere, whenever 
they are not conducting their business in harmony with the best 
interests of society. Nothing can be plainer than this. If banks 
are making imprudent or unwise loans, if they are abusing in 
any way the laws of their corporate life, it is the duty of the 
government to correct such abuses by applying the most effica- 
cious remedies. 

We have seen that banks loan a large portion of their funds to 
speculators; that banks injure the mercantile community, which 
includes the productive class of the country, by withdrawing the 
money it needs; and that this evil can be corrected, in part at 



THE RELATION OF BANKS TO SPECULATORS. 165 

least, by forbidding the banks from paying interest on deposits. 
What is clearer than that the government should lay this re- 
striction upon them ? 

The banks say, "Oh! you do this, and we cannot live. It is 
just what our enemies, the private bankers, wish to have done, in 
order to crush us out." Very well. If you cannot live without 
injuring the public more than you benefit it, you ought to be 
crushed out. Besides, you are not obliged to exist at all. If you 
cannot make money enough without making call loans, and by 
paying interest on deposits in order to get the money to make 
them, then retire from corporate banking, and seek some other 
occupation. The public can be deprived of the benefits you con- 
fer upon it with less loss to itself than if you are permitted to 
live, and they be chased by a pack of greedy speculators. If you 
cannot feed the good fish without feeding the sharks, it is cer- 
tainly preferable that each should pick up a living in other ways. 
For the producer knows that when both are left to procure their 
own subsistence, he will succeed whether the speculator does or 
not. The government may wisely go further than this in forbid- 
ding the payment of interest on deposits. It may forbid the 
banks from taking gold as collateral for loans. No one will keep 
gold except for speculative purposes, and the fact that one wishes 
to use it as a basis for loans is evidence enough that he holds it 
merely for speculation. The banks know this. Nothing is plainer 
than that if such a law were passed it would diminish speculation 
in gold by cutting off the supply of funds to pay for the gold 
purchased. 



XIII. 



THE INFLUENCE OF CREDIT ON PRICES. 



A great deal has been written concerning the influence of 
credit on prices. Yet the subject is simple enough. Suppose the 
banks increase their circulation to one thousand millions of 
dollars, promising to redeem it on demand in gold? Would this 
enormous amount of promises have any influence on prices ? 
Probably. Supposing the people had confidence that they would 
be surely paid according to their tenor, they would have precisely 
the same influence on prices as a like increase of gold. If the 
addition of so much gold would increase prices, so would these 
bank notes which are substituted for it. So long as people have 
full confidence that gold and bank notes, or other instruments of 
credit, are really and instantly convertible into each otherj the in- 
fluence of each upon prices is the same.* Thus far there is no 
difficulty with the nature of credit. 

At this point we must distinguish between a depreciation in the 
measure of value and an increase of prices. In the strict sense 
of the phrase, as we have seen, no such distinction can be made, 

* " There is scarcely any shape into which credit can be cast, in which it will not at times 
be called to perform the functions of money, and whether that shape be a bank note or a 
bill of exchange, or a banker's check, the process is in every essential particular the same, and 
the result is the same." Fullarton on the Reg. of Currencies, p. 25, 



THE INFLUENCE OF CREDIT ON PRICES. 167 

but popularly there is one. We are all familiar with the fact that 
the prices of things were greatly enhanced during the late war, 
measured or estimated in paper dollars — that is, legal-tender notes, 
which were given in exchange. Yet prices remained nearly the 
same, measured by the gold standard, for as large a quantity 
of wheat could be purchased for the same amount of gold as be- 
fore. What, therefore, happened was not, popularly speaking, an 
increase of prices (suppposing the price of things measured in 
gold to remain the same), but a depreciation in the measure of 
value. The paper measure was not equivalent to the metallic 
measure. 

The fall and rise of prices is governed directly or immediately 
by the law of supply or demand, though a very vague and de- 
fective law. Then demand, in turn, is sharpened by the amount 
of money which the buyer may have to purchase with. If he 
have plenty, then he will purchase more ; if short, he will pur- 
chase less. But if he have credit, this is a substitute for money; 
and if it be equivalent to money, then he buys just as cheaply 
as though money was paid. " Credit, m short," says Mr. Mill,* 
" has exactly the same purchasing power with money, and as 
money tells upon prices, not simply in proportion to its amount, 
but to its amount multiplied by the number of times it changes 
hands, so also does credit, and credit transferable from hand to 
hand is in that proportion more potent than credit which only 
performs one purchase." 

Confidence is rarely perfect. The merchant knows that custom- 

* Princ of Pol. Econ., vol. 2, p. 75, (Fifth Lond. ed.) There is no contradiction in Mill's 
writings about credit, as Macleod has earnestly labored to show. Princ. 0/ Econ. Philos., pp. 
616-673, (id ed.) When Mill says that credit is not capital, he means by credit the power to 
borrow money. The transfer of money is not the creation, but merely the transfer of capital. 
The power to buy goods, etc.. without giving anything in exchange, this is capital, and Mill 
does not deny it. He is silent in respect to it. 



1 68 THE INFLUENCE OF CREDIT ON PRICES. 

ers are frequently failing in business. He expects that among all 
to whom he sells, some will fail to pay. Hence in fixing a price 
at which he shall sell his goods, an additional price is charged to 
cover this prospective loss. In other words, he becomes his own 
insurer against loss arising from the failure of customers. The 
cost of this insurance is an additional price to the goods which, 
of course, would not be charged if immediate payment were 
made. 

It is true, therefore, that price depends immediately upon supply 
and demand which, in turn, is very much increased by the giving 
of credit. Says Fawcett : " If it were not for credit, the demand 
for commodities would frequently be much less than it is. In 
fact, when credit is freely given, the demand for a commodity 
may increase without any assignable limits."* 

How are sellers able to give so much credit ? By obtaining it 
from those of whom they buy, and from others, though principally 
from banks. The latter furnish credit by exchanging notes with 
their customers. The reason why the customer seeks to exchange 
is because bank notes inspire a higher confidence than his own. 
The bank may be willing to trust him, but others are not; or, it 
may be more advantageous to owe the bank than the party to 
whom the notes of the bank are paid. 

Let us now begin at the other end of the chain of influences 
acting on price. If the banks, or the individuals, did not in the 
first place loan their credit, others could not buy so many goods, 

''Man. of Polit. Econ., p. 387, (3d ed.) Says Prof. Price: "What raises prices universally 
is buying, whether that buying be made by the transfer of an article of equivalent value, such 
as coin, or whether the goods are sold and delivered without payment being made at the 
time. The greater the buying, either on trust or with coin, the stronger will be the tendency 
of the articles in demand to rise in price. The particular manner in which evidence is obtained 
of goods having been delivered without payment, and security taken, by bill or note, that this 
deferred payment shall in due time be effected, is utterly insignificant, so far as concerns any 
action on prices." — Princ. of Currency, p. 168. 



THE INFLUENCE OF CREDIT ON PRICES. 169 

hence, there would not be so great demand for them, and conse- 
quently, their price would be less. Credit from whomsoever de- 
rived, increases price by stimulating and feeding demand. There- 
fore, the banks are not alone justly chargeable with the evils 
springing out of the credit system, according to the opinion of 
some writers, but only in common with all who give credit, and 
in proportion to the respective amounts given by banks and indi- 
viduals. 



XIV. 

ON LEGAL INTERFERENCE WITH THE LOAN OF 
MONEY, PAYMENT OF LABOR, AND CONTRACTS 
OF CORPORATIONS. 



In this chapter we shall consider the right and expediency of 
the State to interfere in the making of three classes of contracts, 
namely: Contracts for Labor, Usury Laws, and Contracts of Cor- 
porations, leaving the question of enacting protective laws to be 
discussed in the chapter following. 

Why does any one seek State interference in these matters ? A 
true answer reveals the selfishness and tyranny of mankind. 

Employers generally have wealth', either inherited or acquired, 
while the laborer's wealth is in brain and limb. Let his body die 
or be impaired by accident or disease, and his wealth is dimin- 
ished or forever lost. 

From the situation of the parties, it is evident that the employer 
has the advantage. Of course, his wealth will not increase with- 
out the co-operation of labor; but if he cannot employ it upon 
his own, terms, he can wait till the laborer yields. Not so fortu- 
nate is the son of toil. He must take what he can get or starve. 
Work or starvation is the only alternative of his life. The 



ON LEGAL INTERFERENCE. 171 

capitalist, knowing this, profits by the fact in offering terms 
of wages. He really fixes the price of labor himself; the other 
party merely assents to the sum offered. This is the true situa- 
tion of the parties when it is fully unmasked. The law of de- 
mand and supply has many holes in it, and here is a big one. 
The laws governing human action cannot be half as clearly traced 
as the laws of nature and of God. The law of demand and sup- 
ply, which is thought to have such a universal operation in the 
field of economic science, is only a crooked brook that not infre- 
quently is absorbed in the sands of selfishness, or diverted by 
superior force. In the older countries, especially, the capitalist has 
a tremendous advantage, because the quantity of labor is practi- 
cally unhmited. There not being work enough for all, the em- 
ployer dictates his own terms ; even if all had work, the mind of 
the employer might not change. Wealth would still hold the key 
to the situation. 

Thus we come in sight of the first question touching contracts 
for labor — has the State a right to interfere in behalf of the 
laborer in fixing the terms of the contract for his services ; and if 
the right be admitted, is it expedient for the State to exercise this 
right ? Let us follow the case of the laborer one step farther. 
It is not for the interest of the capitalist to suffer labor to perish; 
if he did, his own profits would be lost. He seeks to retain him, 
paying the smallest sum necessary for that purpose. 

The beautiful rule of equity would divide profits differently. It 
would give the employed a reasonable sum for his work, and the 
capitalist a like sum for the use of his capital and skill, and di- 
vide the balance, if any remained, fairly between the two. This 
is not the way, however, that the capitalist generally looks at the 
question. He seeks to find out the least for which he can em- 



1^2 ON LEGAL INTERFERENCE, 

ploy laborers and keep them from starving, and retains the rest of 
the income flowing from his business for himself. 

This, of course, is stating the question in the broadest way, and 
several objections may be made to this form of statement. In the 
first place, some capitalists divide their profits equitably with their 
workmen. Splendid instances of this have occurred in the history 
of British industry. Various trials are making in all the more en- 
lightened countries to devise a practicable mode of dividing profits 
between employer and employed. In the second place, the la- 
borer in this country exercises greater freedom in making contracts 
than in the old. This happens from the smaller number of work- 
men in proportion to the amount of work to be done, and from 
the abundance of unoccupied land which he can improve if he 
fails to make a satisfactory agreement with his employer. 

This, then, is the second question raised by the laborer — shall 
not the Government make laws fairly distributing the profits be- 
tween the two classes ? The argument upon which he founds his 
claim is briefly this, that he has contributed the larger share in 
earning the profits, hence they ought fairly to be divided, 

A similar foundation of facts lies beneath the usury law, " The 
lender " so the borrower declares, " means to oppress me ; he has 
the same advantage over me that the employer has over the la- 
borer." The lender, for example, exacts ten per cent, for the use 
of his money, and will not loan it for less. Having ample means 
to supply his wants, even if a part of his property is not earning 
interest, he can suffer a portion of it to lie idle for the purpose of 
bringing the borrower to terms. He watches the borrower, pries 
into his business, and finds out how much he is making, and then 
guesses how high a rate of interest he will pay for the use of the 
money. The more profitable the business, the more he will pay 



ON LEGAL INTERFERENCE. 1 73 

rather than go without it. The lender marks up to the highest 
notch, and beUeves that by waiting, the borrower will crawl up 
to his figures. 

The borrower says: "This advantage you ought not to take," 
and he calls upon the State to prevent the lender from reaping it. 
He seeks to get upon an even plane with the lender by force of 
law. Like the capitalist in fixing the rate of wages, the money 
lender would fix the rate of interest so high as to reserve the 
smallest amount of profits to the borrower accruing fi-om the mon- 
ey loaned. If the borrower be a merchant, the lender says to 
himself: "How much money is A making in his business," and 
according to the conclusion is the rate of interest asked. 

If a usury law is passed to prevent the lender from obtaining 
too great a reward, the same principle may be applied to prevent 
the farmer from charging too much for his potatoes. i\s a fact, 
however, there is not much danger of lenders generally charging 
excessively high rates of interest. This is especially true of banks. 
They keep within bounds. During the panic of 1873, when money 
commanded enormous prices, banks supplied their customers, so 
far as they supplied them at all, at the old rates. Individuals are 
disposed to charge higher rates than banking institutions. The 
reason is, banks are loaning the money of other people, and are 
more merciful than individuals when lending their own. This is 
especially true of savings banks. They consider what a man can 
afford to pay. But if a usury law is passed to prevent banks from 
taking advantages, logically it should cover all cases. All men 
who are taking advantage of others by selling at too profitable 
rates, must have the law applied to them. 

From this rapid survey of the motives leading men to seek the 
interference of Government, it will be seen that the reason is to 



174 ON LEGAL INTERFERENCE. 

help one class in, or to prevent one class from, getting an advantage 
over another. It is to enable one or more persons in obtaining 
an advantage over the rest, or in neutralizing an advantage 
already possessed. 

Even Government itself, in our opinion, owes its origin to this 
very desire of one man, or a set of men, to obtain an advantage 
over others. In the beginning, one or a few ruled the rest 
by virtue of superior force or wisdom, as they rule now. If it 
were not to obtain an advantage in accumulating property, it was 
to gratify the desire for governing, to have ideas and opinions 
triumph. We do not believe that Government was founded in 
acquiescence or agreement ; a pure democracy is the consummate 
flower of civilization. The lesson taught by history is that the 
one-man power existed in the beginning; the right of the people 
to rule and choose their own sovereigns is a principle issuing 
from a long and bitter warfare. This usurpation, in the first in- 
stance, was to get some sort of an advantage by an individual or 
by a few, and to retain it if possible. It is only another illustra- 
tion of the spirit prevailing in all times and countries of get- 
ting advantages whenever it is possible ; of the strong ruling the 
weak. A democratic Government is no exception. The nearer 
the approach to a pure democracy, the more equal is the liberty 
and the power enjoyed ; but in the fairest Government that has 
yet bloomed on the face of the earth, a few have led public opin- 
ion and ruled the rest, and the mass have been willing to follow. 
They have realized, to some extent, their own weakness, and the 
need of rulers. No king, unaided and alone, has made and exe- 
cuted law for the rest. But kings have identified the interests of 
a class with their own, and so have been able to tyrannize over 
the greater number. The wider the ruling class, the more dis- 



ON LEGAL INTERFERENCE. 1 75 

tributed is the advantage, yet, even in our own beloved land, who 
will deny that the dominant party has always used the machinery 
of Government for personal ends, and will thus use it till parties 
are less deeply immersed in selfishness than they are now ? This 
is the principal source of a party's strength, that it can use the 
Government for the advantage of its members. Let party service 
become purely disinterested, and the zeal of most of its members 
would cool off as suddenly and as greatly as their bodies would if 
placed around the north pole in the dead of winter. 

From this analysis of the motives of people in making agree- 
ments, we have seen that the assistance of the State is sought to 
balance the situation of those opposed to each other in business 
so that they may be able to contract on fair terms ; or else to 
make the advantages already possessed by any one greater still. 
It is either to even up the condition of mankind, or to make 
those well-off better-off 

Having stated the problem in the broadest manner, we shall 
proceed to consider whether the Government has a right to inter- 
fere in the cases mentioned. This involves a consideration of the 
functions of Government. By no shorter cut can we reach any 
satisfactory conclusion. 

One class of very able thinkers maintain that every man is en- 
titled to the fullest liberty subject to the enjoyment of like liberty 
by every other individual. Not till a person breaks in upon the 
liberty of another, has the Government a right to interfere. This 
class sometimes state their doctrine in a shorter way, namely, that 
the cardinal duty of the State is to administer justice. Whether 
right or wrong, they are entitled to the merit of stating the func- 
tions of Government more precisely than any other class. They 
.have carved out its functions exactly and logically in many 



176 " ON LEGAL INTERFERENCE. 

minute particulars. But if those holding a different view are 
less able to state the exact functions of Government in some 
respects, the reason is, that ascribing broader functions to 
Government, it is more difficult, nay impossible, to draw any 
hard and fast line defining those functions.* Yet, may not this 
very impossibility to realize or express the broader functions 
of Government, indicate that the view is deeper and nearer the 
truth ? The truths most clearly seen are those lying nearest to us 
and which are the most shallow ; beneath the crust we grope in 
darkness and difficulty, yet we know that the solid earth is there, 
although we can tell less about its qualities. There is a way of 
getting a clear notion of a thing, as Comte got of philosophy, 
by throwing out all difficult questions and maintaining that they 
do not exist ; but all minds will not be satisfied with solving ques- 
tions in this way. According to our way of thinking, those who 
have obtained such limpid and simple views of Government have 
dealt with the question very much as Comte treated philosophy. 

It may be noted that those holding the narrow view of Govern- 
ment — which is the one first stated — support it by reference to the 
origin of Government itself. Such a reference is wholly useless, 
unless it be maintained that society is bound by the original con- 
ception of a Government. If society is left free to change its 
Government, either in enlarging or narrowing its functions, its 
original structure is not of the slightest consequence. 

No society can impose terms upon their successors. The past 
has no claim upon the future and cannot dictate to it. We may 
accept what others have bequeathed, but there is no law compel- 

* Says Mr. Mill : " In attempting to enumerate the necessary functions of Government, 
we find them to be considerably more multifarious than most people are at first aware of, and 
not capable of being circumscribed by those very definite lines of demarcation, which, in the 
inconsiderateness of popular discussion, it is often attempted to draw around them." — Princ. of 
Polit. Econ., vol. 2, p. 387. 



ON LEGAL INTERFERF.N'CE. 1 77 

ing a legatee to accept a legacy. Society is progressive and needs 
a progressive form of tiovernment. That society is of this char- 
acter, SPENtER and the rest of his class holding to the narrow 
functions of Government, will not deny ; indeed, it figures more 
prominently in their doctrine of Government than in ours. But if 
mankind are growing better, they need a better Ciovernment to 
suit their improving condition. To maintain that the same kind 
of Government is best, both for the rudest and most enlightened, 
is ridiculous. In Christian theology it has come to be a recog- 
nized truth, that as intelligence increases, and things spiritual are 
more clearly discerned, theology changes and improves. Instead 
of being a perfected system, the profounder study of the Script- 
ures with the new light reflected upon them by modern scholar- 
ship, theology is brought nearer to perfection. The an;dogy holds 
in respect to Government, as mankmd increase in intelligence and 
goodness, and become more inter-related, their conceptions of 
Government change to suit their advanced condition. 

If this be granted, we care not whether the original Govern- 
ment was founded upon the principle enunciated by Hkrrkrt 
Spencer, or upon some other, or upon no principle at all ; the 
sole question is, what is the best Government for mankind to-day ? 
It is possible that Spencer's principle — mankind should be allowed 
to exercise the fullest liberty subject to the exercise of like liberty 
by every other individual— is the correct one. In enunciating it, 
though, Spencer undoubtedly thought it was in harmony with a 
princijile lying still deeper, namely, that such a limitation of the 
functions of Government was best for the good of the individual. 
Certainly he would not deny that this was the end he had in 
view both in prescribing a Government and in finding its limitations; 
hence, in determining the functions of Government, we must in- 
1.^ 



178 ON LEGAL INTERFERENCE. 

quire, what kind of one is best for us ? How shall its powers 
be limited so as not to interfere with our highest progress ? Here 
is the true starting point whence all inquirers set out. 

Nor will it be much questioned that the highest good of each 
individual is in harmony with the highest good of every other, 
thus making no difference, when looking after the best Govern- 
ment, whether we fix our eyes upon the good of one or the good 
of all. We need spend no time, then, over this point. 

A Government having for its end the highest good of its sub- 
jects cannot be stationary in its scope, it must change. For, as 
our ideas of good approach nearer to the absolute and perfect 
truth. Government must change to correspond with them. Suppose 
the only good thought of in the beginning was material and low. 
Government evidently must correspond with it; as the conception 
of good grows and blossoms fair and beautiful, a corresponding 
change is wrought in the nature and province of Government. 
The symbol of man himself, and yet an instrument to make him 
better, it must ever change to promote his good. No conception 
of a definite Government for all time is possible by reason of the 
incessant changes of human life ; nor is a fixed Government to be 
desired. 

As a general rule. Government promotes the good of those far- 
thest advanced least ; this is easily enough seen. All laws are a 
succession of compromises between the wants of the better class 
and other classes not so good. Laws really represent the complete 
wishes of no class, being more severe perhaps than one class de- 
sires, and not severe enough for another. This is especially true 
of penal laws, nevertheless all are more beneficent in their opera- 
tion upon one class than upon another. Laws operating to the 
equal advantage of every member of society are scarce. Still, if 



ON LEGAL INTERFERENCE. lyg 

a law does not always reflect the most advanced sentiment of so- 
ciety it is an approximation to it, and by and by becomes the sen- 
timent of many, affording some degree of protection. So the doc- 
trine that law has an eiHucating and uplifting power, if actually 
containing more truth than some believe, is not wholly false; al- 
though the danger of the non-enforcement of such laws, even if 
enacted, is too great to warrant their enactment upon this ground. 
The evil growing out of a law which cannot be enforced, because 
opposed to the sentiment and force necessary to execute it, is 
greater than its educating power. The law is for the law-breaker, 
not the keeper of it ; hence it must be a law that can be enforced. 
I. aw for those who are always willing to keep them are not laws, 
only rules. 

As the civilization of society increases, each member is more 
closely inter-related to every other member, affects him more, and 
so the functions of Government must widen. Prof Huxley has 
stated this truth in an admirable way. "The higher the state of 
civilization, the more completely do the actions of one member of 
the social body influence all the rest, and the less possible is it 
for any one man to do a wrong thing without interfering, more 
or less, with the freedom of all his fellow-citizens." Consequently, 
if the functions of Government were pared down to self-protection 
merely, yet as the actions of men affect each other more and 
more, the sphere of (Government must continually widen in order 
to furnish that self-protection which even Spencer admits Govern- 
ment is bound to furnish. 

Spencer and those holding similar views of Government advo- 
cate the largest measure of liberty for all, because they believe 
that human improvement is most rai)i(l under that condilion. 
They will not deny that man should aim to reach the highest end 



l8o - ON LEGAL INTERFERENCE. 

known to himself, and that Government, so far as possible, ought 
to be used to bear him upward toward that end. In fact, they 
cannot deny these statements without involving themselves in con- 
tradiction. For, the very reason why they have set up the lib- 
erty-theory is because man will develop most rapidly under it. 
Perhaps it is not correct to say that Government is a reformatory 
or remedial institution, yet it is, and there is no disputing the fact. 
The end of all wholesome laws is to improve society by punishing 
crime and restraining wrong-doing. All punishment is aimed at 
both things — to render justice and prevent the commission of 
crime. ' Is it true that man will flourish best in the exercise of 
the highest liberty ? This is the belief of those who narrow down 
the functions of Government. Are plants the most beautiful in a 
state of nature ? Are they not made fairer by cultivation ? Do 
not careful watching, pruning, and watering of them, increase their 
beauty of form and color ? Who questions that men improve 
more rapidly under a state of cultivation ? What progress would 
the student make in his earlier years if left to the exercise of the 
largest literty in the choice of his studies and in the mode of 
pursuing them ? Who ever heard of a savage blossoming in 
beauty unto perfection like the most perfect flower ? The finest 
intellect, art, morality, religion, is the product of the greatest care, 
toil, and restraint in living. The State can do something in the 
way of instructing and directing men ; hpw much it can do is a 
question. Undoubtedly it cannot do half as much as the popular 
mind believes it can. The opinions of many are altogether too 
sanguine concerning the educating and restraining power of the 
State. The State has often undertaken to do things which it 
ought to have left alone. It is not true, however, that the State 
contains no civilizing power, or that men will develop most rapid- 



ON LEGAL INTERFERENCE. l8l 

ly when left to themselves, or with other helps than the State, 
which they ;iiay call into use. A great many do not want to help 
themselves and would not improve their condition if they could. 
Firmly as we believe in the ultimate perfectibility of man, he is 
now fearfully depraved and his aspirations to improve are so fee- 
ble as to be easil)- o\erpowered by his evil genius of a will. 
Spencer does not consider sufficiently the evil tendencies of man 
and the need of his coercion and severe discipline. He is all the 
better for every proper restraint and check. He is like a garden 
vegetable that will spend all its force in extending its vines or 
branches, and bearing no truit, unless it be clipped in its lux- 
uriant growth. We admit that a great many State checks have 
dwarfed rather than developed the powers of man, but not always. 
Spencer has illustrated the first fact in a most brilliant manner, 
and by so doing has popularized a theory which we believe to be 
unsound and pernicious to society. Government has done its good 
things ns well as its evil ones, and the former ought 'not be for- 
gotten in the condemnation of the latter. Spencer has proved be- 
yond a question that the Government is continually attempting to 
do what it cannot do, or can only do in a most feeble way. It 
were much better for both Government and people that it had 
never undertaken many things it has. This is the strongest side of 
Spencer's teachings, the showing up of the numerous failures of 
Government to essay the impossible and the impracticable. 

We have previously observed that all people are hving for the 
highest good. This is true in a general sense. It is of no con- 
sequence in what phraseology this idea is clothed, whether it be 
simply the highest, or the highest end, or the highest good, or the 
greatest happiness, or in some other clothing. The sole concep- 
tion is that every person has some supreme purpose in life, al- 



182 ON LEGAL INTERFERENCE. 

though that purpose may be as different with individuals as they 
are unhke in character. The highest end of one may be in serving 
God, that of another in getting drunk; but that each has a su- 
preme end in view will not be denied. 

Now, we maintain that the end of Government ought to be 
what it practically is in many cases, to assist society in attaining 
its highest end. Everything Government can do in that direction 
is within its province; by this end are its powers limited. 

This object of Government has the merit of simplicity and com- 
prehensiveness. It is sanctioned by experience and by great 
names, though perhaps no one has expressed the idea in a nobler 
and briefer way than Locke, who declared, " That the end of 
Government is the good of mankind." 

If this view be correct, the functions of Government will change 
with the growing conceptions of the highest end of living. There 
can be no permanent sphere for it, because of the incessant 
changes going on in society. If mankind made no progress and 
suffered no decline, then it would be easy enough to mark out 
the track for Government to pursue, and give it permanent 
bounds. But we are progressing. Through blood and tears man 
is looking up and struggling to reach a better state. The weeds 
of misery grow more luxuriantly than the good and hide its fair- 
est flowers; nevertheless the good also grows and one day will 
bloom in perfect beauty. No impartial reader of history can fail 
to see that the world is overcoming evil and attaining to higher 
notions of the true end of life. With this advancement, a strange 
and direful confusion would be wrought were Government to con- 
tinue in a narrow, worn-out track. 

It does not follow, in the • spreading of Government over a 
broader field, that legal penalties will increase in number and 



ON LEGAL INTERFERENCE. 1 83 

heaviness. Quite the contrary. They will be fewer and lighter 
with better living. Only murder is punished with death in this 
country and Great Britain, yet in Coleridge's time the forg- 
ing of a frank upon a letter was punished in this manner. Laws 
increase in number with the progress of civilization, but they ap- 
proximate more and more toward rules for the conduct of the in- 
• dividual. 

We imagine that in a perfect moral Government, there will be 
only rules governing the intercourse of its members, without any 
penalties whatever, for they would be unnecessary; but rules will 
not be less numerous because there are none to break them. 
Rules are needed for our guidance even if there be no disposition 
to set them aside. 

In the establishment and maintenance of Government for this 
object, the good of man, the believer in its divine origin and the 
scouter of this doctrine can agree. For the conception of the 
part which Government should play in reaching the highest, is the 
conception of a majority or of a smaller number of those living 
under it. We have adverted to the manner in which Govern- 
ment, in our opinion, sprang into being. Practically, every Gov- 
ernment is that of the few, one man by virtue of greater force, 
or surpassing ability, or rascality, may govern, but after all, more 
than one alone must govern any people. He must have friends 
to support him, else his Government will inevitably be overturned. 
Even the most despotic Government has several rulers. Control 
obtained of the army by Napoleon, who united their interests with 
his own, enabled him to plant himself on the throne of France. 
Be a Government ever so democratic a few leaders rule. There 
may be more of them at one time than at another, nevertheless 
a few^ do the thinking and controlling for society. Only now 



154 ON LEGAL INTERFERENCE. 

and then is one found who thinks ; fewer act. Those who both 
think and act have always controlled society, and they always will. 
The functions of Government are not always those which B and 
C would set up, but are those set up by the leaders of society. 
If the greatest liberty be allowed, this is thought to be conducive 
to the best interests of all ; if the least liberty is tol'erated, the rear 
son is the same. Hence the functions of Government may be few 
or many; the end of it may be very low or very exalted. It may 
permit the vilest practices, or it may prevent all such. In either 
case, the believer in a divine order would see that so far as 
Government went, it was an approximation to the Government of 
God, which is one day to prevail (according to his behef), while 
another class would only see that the idea of God or a divine order 
was absurd. The former class might mourn over the rules of 
society because they contained such faint glimmerings of the highest 
end of man and of the best Government for him, yet he would 
acknowledge that the rulers saw a real glimmer of these things, 
however faint. 

Let us not leave this point quite yet. The believer in the 
Divine affirms that a time is coming when all will be perfect, 
obeying a perfect moral law, which God will give. The seer 
looks upon the present Government as a shadow and an indica- 
tion of the perfect one to come. So far as Government goes, it 
is a revelation of God to its makers and upholders, the unfolding 
of the Divine idea, either consciously or unconsciously to them- 
selves. The seer beholds in the progress of mankind and in the 
progress of Government a glimpse of the perfect day. Crude is 
the Divine idea within, but it is there, and will not die for it is 
planted and nurtured by God; 

The disbeliever in the supernatural says : " This is all nonsense." 



ON LEGAL INTERFERENCE. I 85 

He affirms that Government 'is a purely human contrivance. 
" Very well," replies the other, " we can live together, for we 
agree that both are living for the highest, and that the object of 
Government is to help us on in our way. We agree as to whither 
Government is tending, and what its functions shall be; we only 
differ as to the source whence the laws proceed." The one 
claims they are pure human exi)edients ; the other, the ex])ression, 
though imperfect, of the Divine will. 

Thus it Is seen that as all live for the same absolute end, though 
not for the same relative one, the functions of Government main- 
tained by both classes are the same, and are determined by the 
collective mind controlling society. Hence, Government is agree- 
able to all. Who is right as to the human or Divine power 
entering into Government and making it what it is, the future 
alone can reveal. If the Christian's belief is right, he will expect 
to see Government growing more and more into the likeness of 
the eternal Government of God, till the human contrivance is 
absorbed and lost in the splendor of the other. If he is wrong, 
then he must confess that Government is purely a human device. 

Having shown what, in our opinion, is the true end of Govern- 
ment, it remains for us to answer the questions announced in the 
beginning. Whether Government shall interfere in any of the cases 
mentioned, depends upon the effect of such interference upon 
society. We have shown that the reason why Government inter- 
ference is sought in any case is to get, or to prevent, an advan- 
tage of one person or more over others. In our opinion, Govern- 
ment ought to assist no class in obtaining an advantage over 
another, whether the class be living in the same country or else- 
where. Government must preserve equality, and not make in- 
equalities greater. This is clear enough. But how far it shall go 



I 86 ON LEGAL INTERFERENCE. 

in the way of leveling the inequalities now existing; how far in 
the way of preventing advantages from being taken, is a question 
of expediency. We do not question the right of the Government 
to go very far in this direction. We do not believe that Govern- 
ment is to exist in a land of darkness and in the shadow of death, 
to see one class crush down another by monopoly and oppression, 
and put forth no power to save the wronged and the weak. 
Such destruction of the interests of a class is the funeral of the 
nation in more senses than one. And the nation has a right, if 
it thinks best, to stop these things. This, of course, is predicated 
upon the idea that it has the ability to prevent undue advantages 
if it pleases. If it cannot, that is the end of the matter. 

Government has certainly gone the whole length for which we 
contend. What is the object of a usury law save to prevent 
one class from taking advantage of another ? The money lender 
oppresses the borrower in exacting excessively high rates of inter- 
est. The law is aimed to prevent this. But the principle involved 
in the law by which Government interferes to prevent the taking 
of an undue advantage in the loan of money, applies with equal 
force to every thing else which men buy, sell, and use. 

Some claim that Government has the right to step in and regu- 
late the charge for the use of money because it is the creation of 
Government; but this claim is thinner than gossamer. Govern- 
ment is not the creator of value. That depends upon the desire 
for a thing and the difficulty of attaining it. Value is purely 
within human control. Is not the five-dollar gold-piece worth 
just as much in an uncoined as in a coined state ? Its value is 
dependent upon its weight and purity, and not upon the work of 
the Government. Remove every trace of the Governmental super- 
scription, re-melt a gold coin, and the shapeless piece of yellow 



ON LEGAL INTERFERENCE. 1 87 

metal will be worth as much as before. This proves that Govern- 
ment exercises no peculiar power or charm over money ; hence, it 
has no right by virtue of anything it does to money to say how 
much shall be paid for the use thereof There is no mysterious 
property clinging to money. The sole difference between money 
and other things is that the former, generally, has a wider purchas- 
ing power. We have tried to prove that Government has a right 
of determining how much shall be paid for the use of money, but 
solely upon the ground of preventing one citizen from taking an 
unjust advantage of another. 

Whether Government should exercise this right depends upon 
two questions : first, whetlier the advantage be so great as to call 
for Government interference; secondly, whether it has the power 
to interfere efifeclively. Whatever the past may show, we believe 
that the oppression now is not great enough to warrant interference 
on the part of the State; and if we admitted that it was, it is 
clear as crystal that Government cannot interfere effectively to 
prevent advantages from being taken. This has been proved over 
and over again. There is pot a usury law in existence, in any 
State of the Union, to-day, that is anything but a dead letter, 
buried out of sight and almost out of memory. So much for a 
usury law. 

The two questions concerning the payment of labor may be 
answered together. Government has a perfect right to interfere, 
upon the grounds assumed in enacting a usury law, to prevent 
the taking of an improper advantage. Whenever the advantages 
between capitalist and laborers become too great on the one side 
or on the other. Government may interfere to prevent their occur- 
rence. If the capitalist squeezes the laborer too hard, or divides 
too small a portion of the profits, or the laborer demands too 



1 88 ON LEGAL INTERFERENCE. 

much pay, Government has the right, according to the foregoing 
reasoning, of determining what the one shall pay and the other 
receive. As for the need, or practicaoility of any such interfer- 
ence on the part of the State, there is none. Both adjust their 
differences more easily than the State could for them; indeed, it 
would cut a sorry figure if attempting to make an adjustment. 

We come now to the last class of contracts, those of corpora- 
tions. These are creatures of the State, they have their birth and 
existence by the favor of the State, yet the longer they live, the 
more do they forget their parentage and dependence. They seem 
to think, after a time, that they are very much like other folks, 
entitled to all the rights they have and many besides. The peo- 
ple must not forget the true origin and character of corporations. 
With their gigantic growth in this country, with their enormous 
aggregation of wealth, they deserve the most careful watching. For 
the most superficial glance at their working and aims shows that 
they propose to ask a great deal more of the State in the future, 
and to abuse the mother which gave them being. Their creation 
was justified on the ground that they would prove beneficial to 
the community, but we fear of their becoming its curse. 

It must not be forgotten that corporations are creatures of the 
State and subject to its control. There is no analogy between 
them and individuals. We have shown how the State should 
govern its members, for the good of all. Corporations must be 
governed in the same manner. So long as they are conducted 
for the best interest of all, they should be let alone. When con- 
ducted otherwise, the State must not hesitate to interfere and pre- 
scribe such checks as are called for by the good of society, and 
see that they are enforced. The State must not be beguiled by 
the claims and arrogance of her own children, who are growing 



ON LEGAL INTERFERENCE. 189 

bolder as they increase in wealth and power. For there is dan- 
ger, unless the State be watchful and keeps them in proper 
restraint, that they will become more powerful than the State 
itself. 



XY 



THE ADVANTAGES OF EXCHANGE. 



Many still hug the delusion that in every exchange one party 
or the other must be the loser. They cannot believe that ex- 
changes may be beneficial to all concerned. Yet a slight con- 
sideration of the subject ought to convince them of their error. If 
I exchange a horse for a house, it is because the latter is worth 
more to me than the horse, else why would I make the exchange ? 
And why would the other party exchange if he were not to be a 
gainer by the transaction ? Of course, in this statement, it is im- 
plied that both parties have perfect freedom to do as they like. 
If they are compelled to make exchanges, that is another thing. 
But if a person is compelled to pay a dollar for a loaf of bread 
or starve, although by waiting a little time he could get it for 
one-twentieth of the sum, the case is not changed. One may pay 
a dollar for a loaf in order to keep from starving, a most exorbi- 
tant price perhaps, yet the bread is worth more than the dollar, 
else it would not be given. 

We must not leave out of sight the fact that mankind are con- 
tinually taking advantage of the situation of things, thus reducing 
the benefits of exchange to one party and increasing them to the 
other. As a general rule each party seeks to get the best of a 



THE ADVANTAGES OF EXCHANGE. igi 

bargain ; that is. to make the most out of it, leaving the least to the 
other party. Nevertheless, something is always left to both parties. 
In every contract there is a margin of profits lying between the 
parties desirous of making it. This profit-margin is of greater or 
less width. The question with each party is, how much of that 
margin can I get ? If one attempts to get all, the other will not 
enter into the agreement ; a portion must always be left for both. 
How much can I get and leave enough to the other party to in- 
duce him to make and execute the agreement ? this is the question 
which people generally put to themselves when making contracts. 
Neither party can take all, else the agreement will not be consum- 
mated ; the profits must be divided between both, and that man 
is regarded as the most adroit who, by deception and covering up 
of his situation, by boldness or other means,, succeeds in getting 
the largest portion of that margin and the execution of the agree- 
ment. Yet the truth remains, that in every exchange all parties 
to it are gainers. 

Freedom of exchange is affected in three ways; by necessity, by 
nature, and by law. 

By necessity, we mean when men are in such a situation that 
no option is left them in making an exchange, and they are 
obliged to pay whatever is asked for a thing. This point we have 
previously considered, yet we further remark, that the taking ad- 
vantage of the situation of a person to get an unreasonable price 
for a thing is to be condemned. If a man is starving, the baker 
cannot morally ask any more for his bread, although his customer 
may be abundantly able to pay an increased price ; if there is a 
famine, the jjrice of corn ought not to be enhanced, except so far 
as may be necessary to lead people into the practice of necessary 
economy ; if money is scarce, the lender ought not to increase rates. 



192 



THE ADVANTAGES OF EXCHANGE. 



A fair profit is all that a man can morally demand for his wares 
or services under the usual conditions of society. 

Restriction of freedom by nature is when checks to exchange 
arise from distance, and the like. Thus, wheat we will say is worth 
seventy-five cents per bushel in New York, and half that sum in 
Chicago. If it costs thirty cents to transport a bushel of wheat" 
to New York, the cost of transportation is a natural check to the 
exchange of the grain between the two points. These restrictions 
of nature often operate as a protection to trade between various 
sections. Thus, if iron be worth ten cents a pound in New York, 
and eight in London, and it costs three cents a pound to trans- 
port it to New York, none will come hither because the cost of 
transportation will operate as a protection to the home manufac- 
turer. Such protection, being natural, forms no ground of just 
complaint. 

The freedom of exchange is sometimes interfered with by law. 
Laws are passed restricting it upon the ground that it is desirable 
to encourage production at home. A manufacturer says: "B ought 
not to be permitted to buy his clothes in London, because, though 
the price may be less, he ought to be willing to pay me more for 
them in order to encourage home industry and make our country 
independent of England." And if he has not sufficient regard for 
the good of his country to buy at home, • then the manufacturer 
demands the enactment of a law which shall virtually prevent him 
from buying abroad and shut him up to the home market. 

Many objections have been made to the enactment of protective 
laws; among others, that the State had no authority to enact 
them, that it was entirely beyond its power to fetter freedom of 
trade, and that every individual has tlie right to buy where he 
can buy cheapest. Whether this ground be valid depends, as we 



THE ADVANTAGES OF EXCHANGE. I93 

have previously shown, upon the question, whether it is for the 
good of the people to enact such laws ? if they are to be benefited, 
no objection can be raised to their enactment. Whether they are 
to be beneficial or not turns mainly upon the question, will there 
be less likelihood of other nations making a monopoly of their 
products if we do not engage in their manufacture ? Thus, if we 
did not manufacture cotton goods, would England charge more 
for them than now? If England sells everything to us without ref- 
erence to production here, there is nothing to the protectionists' 
claim. If English prices are less than they would have been had 
England remained the sole manufacturer, we are benefited by en- 
couraging home manufactures by application of law. 

England undoubtedly charges less for many things because 
we manufacture them. Considering the infirmities of human na- 
ture, the desire to take all the advantage of each other we can, 
we believe that if American industries had not been protected by 
law, England would have proved just as grasping and selfish as 
other nations, and charged us more than we are now paying for 
many of the necessities of life. 

There is, however, another sid6 to the picture. The principal 
object of protective laws has been, not to benefit the many, but 
to enrich the few. There is no virtue, therefore, in that system 
which has been fostered by legislation. If our manufacturers have 
increased, and we are made independent of England, the object 
of the Government is pure enough ; yet the object of many a 
manufacturer will not bear examination. Most of them are like 
the rest of the world, seeking aid fi-om the Government whenever 
they can, in order to make money. 

What conclusion, then, shall be drawn in respect to protective 
legislation ? We cannot reach such a sweeping conclusion as is 

14 



194 THE ADVANTAGES OF EXCHANGE. 

deduced generally, that protective laws are wholly good or wholly 
bad. In some instances, undeniably, the building up of our in- 
dustries at home has made us independent of foreign nations, and 
we purchase at less prices because we can supply our wants from 
a wider number of producers. Had we pursued . the opposite 
policy, we should have been screwed down to higher prices. Pro- 
tection, therefore, in some cases, has been a positive benefit. In 
the encouragement of the manufacture of cotton and woolen 
goods we believe that we are the gainers by the system adopted. 
Were we dependent upon foreign markets, they would charge 
more. Yet, we must not leave out of sight the fact that Eng- 
land, France, and Germany, have been competitors for our 
trade, and as long as we have such a wide field in which to pur- 
chase, there is less danger of being ruled by monopolies. 

Protection may be justified . upon the ground of preventing a 
monopoly. Protection is not the proper name to give to such 
legislation, however. The aim of it is to prevent the commission 
of a wrong ; if it does not effect this purpose, there is no justifica- 
tion for it. England has been able to undersell and monopolize 
by screwing down the price of labor. Surely it is just to enact a 
law, if possible, by which labor can get its fair pay. 

There is another side to this question and a most important 
one. We have shown that people are benefited by making ex- 
changes. This is just as true of people living in different countries 
as in different towns. As between people living in the same town 
perfect freedom of exchange is not denied. But why should it be 
denied as between people living in different countries ? The answer 
usually given is, that it is desirable to make every country inde- 
pendent. This we deny. It is not desirable to make any country 
independent except so far as may be necessary to place it upon 



THE ADVANTAGES OF EXCHANGE. 1 95 

an equality with others in making exchanges, in other words, to 
prevent the operation of monopolies. 

The spirit to prevent free intercourse between different countries 
and to create, if possible, an unnatural advantage of one nation 
over another is precisely the same spirit which individuals exhibit in 
their intercourse with each other. Each tries to get the best of the 
bargain. This is because each is selfish. The same principle crops 
out in legislation between the various States by which each State 
tries to get advantages over the rest. 

Lastly, it is applied in our intercourse with foreign nations. 
Protection, therefore, is a radically selfish policy. It is a develop- 
ment of individual selfishness into national selfishness. It is the 
same old spirit, springing from the same source and incapable of 
being defended. Of course, if a nation pursues a selfish policy to- 
wards us, we must in some way seek to correct it. But we have 
taken the initiative. We have been selfish when other nations 
have not. There is no more reason for conducting ourselves differ- 
ently towards the people of other nations than towards one an- 
other, so long as they manifest a right disposition with us. "Hath 
not God made of one blood all nations of men ? " And shall we 
bid eternal defiance to His law, and cultivate selfishness instead of 
benevolence in our conduct towards one another and towards 
other nations ? Away with such horrible thoughts ! let us seek to 
buy and sell at fair prices, and if we are contented with these, no 
one will ever hear of a protective policy adopted unless it be to 
prevent a monopoly. 

There has been a great deal of discussion as to whether labor 
is benefited by protective laws or not. In England, the ques- 
tion has been renewed of enacting protective laws for the benefit 
of the workman. Whether such laws are beneficial to him or 



196 THE ADVANTAGES OF EXCHANGE. 

not, depends upon the question whether the products of his labor 
are all sold in his own country or not. If he makes for a 
foreigji market, he wants no protective laws ; if he makes for a 
home market, the fewer foreign products coming into competition 
with his labor the better for him. 

" Does protection protect ? " is another question which has given 
rise to much dispute. The subject is befogged with a great deal 
of error, and yet it seems to us that the explanation is easy 
enough. If a duty is laid upon a foreign article so high that it 
is not imported and the thing is made at home and sold for a 
profit, there is no question but that protection protects. This is 
as clear as noonday. 

It is unquestionably true that our tariff laws, to a great extent, 
have operated to shut out foreign goods and encourage home 
manufactures. But another principle comes in to modify their 
action. If the iron manufacturer sells his goods at a higher price 
because the foreign article is shut out, although as low perhaps 
as he can afford to make it, the parties buying the goods increase 
the price of their own wares. This is illustrated on a grand 
scale by the railroad companies. It costs them much more to 
equip their roads in consequence of the advance in the price of 
iron, and so they make up the difference by increasing the price 
of freights. Whether protection protects or not, depends upon 
the question how generally other persons besides those protected 
increase the price of their products. If every one increases the 
price of his products comparatively to the increased cost of iron, 
all the benefits of protection are lost. All turns upon that. For 
the protected to get protection, he must not only sell at the 
higher rate, but others must not change their rates. If they do, 
he gains nothing in the end. 



THE ADVANTAGES OF EXCHANGE. 1 97 

As a fact in our history, when a tariff has been increased other 
things have risen in price, one after another, until the rise be- 
came so general that the protective effect of the law was gone, 
resort was then had to additional legislation and the tariff in- 
creased once more. Such is a history of tariff legislation in this 
country. It will be seen, too, the fewer the things protected, the 
more effectual the law. Prices will not rise so rapidly. But if 
the principle of protection be admitted at all, its logical applica- 
tion spreads over all things, coming in competition with foreign 
articles. The principle is so well understood now that it is useless 
to attempt to get more protection; the most that can be hoped is 
to keep the laws where they are. The last time it was attempted 
to increase the rates, the bill was defeated on this very ground, 
that as so many wanted protection the law would be of no avail 
to any person. 

The prime object in establishing protective laws is to benefit a 
class at the expense of the rest. The intent to benefit the State 
is always a secondary object in enacting them. The real object 
is to benefit a few. It is class, not general legislation, and gene- 
rally has wrought most pernicious effects upon every country in- 
dulging in it. If an English manufacturer should cripple an Amer- 
ican manufacturer by underselling him in order to break down his 
business, in such a case the Government could very properly in- 
terfere, because it is an attempt to take an undue advantage of 
another. We have proved that it is the duty of the Government 
to prevent monopoUes and undue advantages. The State can pro- 
tect its industries, although detrimental for a season to the people, 
if the object be to build them up and prevent other nations from 
dictating the price of the commodities protected; that is the sole 
ground for interfering with freedom of trade. When foreigners seek 



198 THE ADVANTAGES OF EXCHANGE. 

no such advantage, but sell for a reasonable price, and for less 
than we can make and sell the same product, it is for our ad- 
vantage to buy of them, and any interference with that liberty for 
the sake of benefiting a class is "iniquitous. 

If it be admitted that protective legislation is for the good of 
society,, of course, it is justifiable. The history of it shows that 
such is not the fact. It is not the intent of those who specially 
seek for it, to benefit society so much in general, as themselves 
in particular. These laws have not had a good effect upon man- 
kind. They have put off the day of universal love and peace, and 
have glorified the narrowness and littleness of the past. With the 
narrow, selfish feeling growing out of this policy, upon which in 
fact it was founded, we have no sympathy. We do not believe in 
the independence of nations. Dependence upon one another as 
individuals and nations strengthens the spirit of unity and the 
bonds of peace. Protection weakens that spirit and encourages 
war, the greatest scourge of rriankind. Conceived in the spirit of 
personal advantage, the history of protective legislation is one of 
the saddest which can be read, for it reveals the dreadful selfish- 
ness and tyranny of mankind. 

There is one other principle pertaining to this subject, that it is 
not always desirable to be independent of other nations if we 
could be. We ought not to seek to live within our shell like a 
turtle. A man who lives only for himself is selfish, runs a miser- 
able life which miserably ends in complete and absolute failure. 
This is equally true of a nation. If it seeks to live by itself, in- 
dependent of the rest of the world, having no commerce, no. inter- 
course, it becomes a cold, selfish nation. Its policy is too narrow. 

If we can study the design of Providence, He made of one 
blood all nations of men, and intended that they should dwell to- 



THE ADVANTAGES OF EXCHANGE. I99 

gether in harmony and unity. He never intended that they 
should be completely isolated any more than the members of a 
family. A common life runs through all, and a policy which 
seeks to destroy that life is contrary to the design of God and 
the best interests of humanity. We were created dependent upon 
one another, and it is this dependence which makes us sympa- 
thetic, peaceful, and eager to help one another. To become inde- 
pendent means to become proud, cold, selfish. This should never 
be. We can never afford to be independent of other nations, we 
need their civilization and they need ours. 

What a vast benefit commerce has been to the world ; but 
commerce is wholly opposed to the protective policy. How it is 
breakmg down jealousy and enmity between nations ! how it is 
drawing the nations together and working for universal peace ! 
It is linking the whole world in one great brotherhood and put- 
ting off forever the day of war and bloodshed. Shall the design 
of God be infringed upon ? Shall the world's peace be de- 
stroyed ? No, never. So long as we have voice or pen it shall 
support that policy which, we believe, originated in heaven, which 
tends to destroy human selfishness and pride, which brings the 
nations of the earth together and makes them one. 

Let us revert to the principle with which we set out, that as in 
individual, so in national exchanges, they are made because both 
sides must gain. What a grand discovery ! " It created a revolu- 
tion in public opinion and in national policy, which directly 
affects the happiness of every human being, and forever removed 
a perennial source of war from the world." 

We do not propose to set aside that beautiful truth. We shall 
recognize it and enforce it, that the selfishness of men may dimin- 
ish and their good increase. 



XVI. 



TAXATION, 



Taxation is one of the most important functions of Government. 
The four cardinal rules to be observed in assessing and collecting 
taxes laid down by Adam Smith, have become classic from their 
frequent repetition, and we cannot do better than state them here. 

" I. — The subject of every State ought to contribute to the sup- 
port of the Government, as nearly as possible in proportion to their 
respective abilities ; that is, in proportion to the revenue which 
they respectively enjoy under the protection of the State. In the 
observation or neglect of this maxim consists what is called quality 
or inequality of taxation. 

" 2. — The tax which each individual is bound to pay ought to 
be certain, and not arbitrary. The time of payment, the manner 
of payment, the quantity to be paid, ought all to be clear and 
plain to the contributor, and to every other person. 

"3. — Every tax ought to be levied at the time, or in the 
manner in which it is most likely to be convenient for the con- 
tributor to pay it. 

"4. — Every tax ought to be so contrived as both to take out 
and keep out of the pockets of the people as little as possible 
over and above what it brings into the public treasury of the 
State." 



TAXATION. 201 

It was following a natural order to place the rule relating to 
equality of taxation first, because it is preeminent in importance. 
We need repeat no commonplaces upon the necessity of observ- 
ing the rule; the necessity is deeply graven in the popular mind, 
and no words can deepen or widen that feeling. What we pro- 
pose to consider are the glaring violations of this rule. 

Double taxation is unequal taxation. From this conclusion 
there is no escape. If A pays a tax upon a piece of property 
once, and B pays a tax upon a similar piece twice, the latter is 
doubly and unjustly taxed. No matter in what form the tax is 
laid, if the specific kind of property is taxed twice it is doubly 
and wrongfully taxed. Most shocking instances of double taxa- 
tion have been reported. 

The most common method of taxing property twice is in assess- 
ing bonds, notes, and other evidences of property. We will begin 
with the taxation of currency.* 

The currency of the country consists principally of the circula- 
tion of the National banks which is taxed by the National Gov- 
ernment. After such a tax is laid, a subsequent taxing of it in 
the fonn of money at interest operates, in most cases, as double 
taxation. The first tax upon the circulation is well enough, but 
that ought to be the end of taxing this form of property, as we 
shall proceed to show. 

Smith, the inevitable illustration, has $ 100,000 of this currency. 
He loans $ 50,000 to Jones, secured by mortgage upon his real 
estate which is taxed for its full value. Its worth, we will say, is 
$75,000. Two-thirds of it is owned virtually by Smith, and one- 
third by Jones. But Smith must pay a tax upon his $ 50,000 at 
interest, and Jones pays a tax upon $75,000 of real estate. 

* See very interesting article in Overland Monthly, vol. ii, p. 351, entitled, " Must, Can 
and Should Money be Taxed ? " 



202 TAXATION. 

Is not this double taxation ? Is not Jones taxed upon what he 
does not actually own to the extent of $ 50,000 ? 

How, then, shall these two parties be taxed ? Jones for the 
full value of the real estate; for we believe that taxes should be 
laid upon property rather than upon individuals, because there is 
a greater certainty in collecting them. Any person who is in pos- 
session of property, and is the nominal owner, ought to be taxed 
for it; and if he is not the actual owner for any or only a part, 
then he can adjust the payment of the tax with the real parties 
in interest. This is by far the preferable rule, for it will avoid a 
vast amount of deception, and the State will collect a larger and 
juster revenue. 

In accordance with this rule, Jones should pay a tax upon 
$75,000. Being obHged to pay it, he will not give Smith so 
much for the use of his money, or he will divide the tax with 
him according to some agreement made between themselves. 

If Jones pays a tax upon that sum, the State ought not to tax 
Smith for $ 50,000 loaned to Jones, because it is represented by 
real estate. It is there. Smith has transferred it to Jones, who 
is taxed for it in the form of real estate. Smith, we will assume, 
was taxed for it before he loaned the money to Jones, as cash 
on hand. He lets Jones have it, who puts it into his list. Is it 
not clear, therefore, to tax Smith for what he has parted with, 
for what Jones is taxed, is double taxation ? The bank issuing 
the $ 100,000 of notes, which Smith has, was taxed for them. 
Smith was taxed for them, so long as they were his; when he let 
Jones have them, the latter was taxed upon his real estate which 
he received in exchange, and that is a sufficient taxing of all 
parties. 

Let us follow the other $50,000 of Smith's currency. He loans 



TAXATION, 203 

$25,000 of it to Brown, who is a merchant. He expends the 
money in the purchase of goods. He is taxed for the full value 
of them. Is there any justice in taxing Smith for the money 
loaned to B ? Certainly not ; it is double taxation. 

Smith loans $25,000 to King, a manufacturer, who expends it 
in the purchase of cotton for his mill, for wages, or keeps it as 
cash on hand. In the first case, King pays a tax upon his raw 
stock; if he has expended it for wages, he pays a tax on his 
manufactured product unsold; or, in the third place, he is taxed 
upon his cash. In either of these three cases, if Smith pays a 
tax besides, the same property is taxed twice. If King has not 
put Smith's money into stock, nor manufactured goods on hand, 
nor has it as cash in the drawer or bank, either he has purchased 
other property upon which he pays a tax, or he has loaned it to 
some one else who pays a tax thereon, or he has wasted or lost 
it in his business. If King has re-invested it, and pays a tax 
upon such an investment, there is no justice in taxing Simith for 
the same property. If King has loaned it to another who pays a 
tax thereon, that is the same thing; if King has lost or squan- 
dered it, surely neither he nor Smith should pay a tax for what 
neither one has. 

All money is loaned in these ways. We believe these instances 
cover nearly all cases. It is clear, therefore, that there is no jus- 
tice in taxing currency after it has been taxed once. 

Another way of stating the same conclusion is this: As all 
indebtedness is equal to the money loaned, the taxation of more 
than either indebtedness or money is double taxation. The State 
is constantly transgressing this line, taxing both. 

The taxation of bonds falls in the same category as mortgages, 
except municipal bonds. They represent, in every instance, real 



204 TAXATION. 

or personal property upon which taxes are paid. A raih-oad cor- 
poration, for example, is taxed for all its property. Where is the 
justice in taxing its bonds ? Such bonds are similar to individual 
mortgages, which we have seen ought not to be taxed. 

It may be said, this question is one purely of the proper 
assessment of the tax; instead of having A pay upon the property 
taxed, we require payment to be made of B. True, this is one 
of the questions involved, and it is a most important one. We 
insist that only actual, tangible property, and franchises should be 
taxed, in the possession of the holder if he has a nominal interest 
therein, although he may not be the actual holder. This rule has 
the best of reasons to support it. First, it will avoid double taxa- 
tion. There is no danger of taxing a piece of land twice through 
mistake. It is sometimes done, but done openly, knowingly. 
Secondly, it will prevent the commission of fraud. Now, the 
owners of bonds, notes, and the like do an enormous amount of 
lying in denying their ownership of such property. Only a very 
small amount of such property is taxed. Probably not one-twen- 
tieth of the bonds in the United States which are taxable are 
put into the lists. People lie and deceive, or in some way evade 
paying taxes upon them. If actual property were taxed, instead 
of the evidences of it, there would , be no chance of practicing 
deception. Real estate, goods, and merchandise cannot be put 
out of existence by words. They exist. How much better, there- 
fore, to tax them, and thus prevent the lying and deception which 
is universally practiced under the system now prevailing ! * 

' * For illustration of the failure to assess and collect taxes upon personal property see Reports 
of Commissioners to Revise the Laws for the Assessment and Collection of Taxes in the State 
of New York. 1871-2. 

"It has been made manifest to every revenue board that convened at Harrisburg, from Feb- 
ruary, 184s, to the present time, that the returns of personalty, and, especially, of moneys at 
in'-erest and stocks, were never a tenth of their actual amounts or values." Report of Commis- 
sioners to City of Philadelphia to Revise the Laws Relating to Taxation. P. 9. 



TAXATION. 205 

Suppose this simple rule were adopted, how far and wide-reach- 
ing it would be! It would cover all mortgages and bonds except 
those issued by municipalities. It would cover all stocks except 
those of money associations, which should be taxed upon their 
franchises — a thing that cannot be lost out of sight by words. It 
would cover all money at interest, inasmuch as this is loaned to 
persons who have invested it in goods and the like, upon which 
a tax is paid. The only species of property not covered by the 
rule is simply the money which a person may have on hand; 
and as this cannot be in value above the whole amount of cur- 
rency issued upon which a tax has been paid by the banks issu- 
ing it, there is no reason for taxing it a second time. 

Were this principle of taxing property adopted, it would be 
more just than any other, because the tax would be paid where 
protection to the property is rendered. The ground for taxing 
property is protection given; but what protection does the State 
of New York, for instance, exercise over property situated in 
Massachusetts ? A lives in Albany, and he holds a mortgage 
upon a piece of property located in the latter State. A tax is 
paid upon the property by B. The property is protected by 
Massachusetts. True A and B are the owners, but the prop- 
erty is not in Albany, hence it ought not to be taxed there. If 
A's deed were stolen, the State of New York might assist him 
in punishing the offender, but the property, of which the deed is 
merely the evidence, is in Massachusetts, is protected by the 
laws there, and A is indebted to that State, not New York, for 
the protection of his property. The same is true of railroad 
bonds and stocks. There is no justice in taxing the evidence of 
property in a place away from where it is, because no protection 
is given. 



2o6 TAXATION. 

It will be said that if the evidences of property are not taxed,! 
great hardship may arise. The following case may be supposed.1 
A man lives in Boston owning one hundred thousand dollars of^ 
New York Central Railroad bonds. He pays no taxes where he 
lives, but enjoys all the privileges of the city and educates his 
children at the public expense. It is asked, is this right? To this 
question two answers may be given. First, his bonds are the 
memoranda of property existing in New York, where he must pay 
a tax to benefit other people and educate their children. Secondly, 
every individual pays a personal tax for the benefits accruing to 
the person, and this should cover a tax to support public educa- 
tion. 

A lives in Boston, but owns a farm in Wisconsin, where it is 
taxed. All admit that this tax is correctly laid. A owns bonds 
or stock in a Wisconsin railroad, which are taxed there, and yet 
he has to pay another tax upon his stock or bonds in Boston. Is 
not the latter tax as unjust as if his farm in Wisconsin were also 
taxed at his place of residence? 

Were this rule adopted, of taxing visible, actual property, and 
franchises, all property would be taxed and more equally than 
now. Our present mode is barbarous in the extreme, leading to 
a vast deal of deception and lying, and enabling thousands who 
ought to pay taxes to escape with paying none. This subject 
merits the serious attention of economists and legislators, and 
provision ought to be inserted in every constitution prohibiting 
double taxation. For this end all should work, for with this to 
rest upon the present absurd and unjust system of taxation gener- 
ally prevailing throughout our country can be broken down, and 
another formed, having its origin in equity and justice. 



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